Should I take the Social Security Leveling Option?

What is the Social Security Leveling Option?

It is a way of taking a pension that pays more before 62 and less after, so that the pension and Social Security together stay about the same. Tennessee law lets a TCRS member covered by Social Security choose it before retiring, so that the member receives, in the statute’s words, “approximately the same amount per year before and after” Social Security begins (Tenn. Code § 8-36-601).

TCRS lists it as one of its two single-life options, beside the Member Only Option, the standard pension (member guide). Before 62, TCRS adds a portion of the Social Security amount you could draw at 62. At 62 the pension drops for life by the full amount of that benefit. The option appears in the guides for both TCRS plans, Legacy and Hybrid, and the Nashville page covers how those plans differ.

How does TCRS work out the numbers?

A 2014 TCRS retirement guide worked through one case. A member retiring at 55 with 30 years of service and $50,000 average final pay had a regular pension of $1,968 a month and a Social Security estimate of $800 at 62. TCRS multiplied the $800 by its age-55 factor, 0.521739, and added the result, $417, so the pension paid $2,385 a month until 62. At 62 it dropped by $800, to $1,585, and with $800 from Social Security the total stayed at $2,385.

Against the regular pension, leveling paid $417 more a month for seven years, about $35,000, and $383 less a month from 62 on. At that rate the smaller checks take back the $35,000 in about seven and a half years, so the regular pension pulls ahead at about 70, before counting cost-of-living raises or interest. The figures date from 2014: TCRS sets your own amounts when you apply.

What happens if you delay Social Security?

The pension still drops at 62. TCRS ties the reduction to your age, not to your Social Security application, so a member who waits to claim lives on the lower pension until the claim starts. In the 2014 example, waiting until 67 would mean five years at $1,585 a month instead of $2,385: $48,000 less income to cover from savings.

Waiting does raise Social Security itself. For anyone whose full retirement age is 67, the Social Security Administration reduces a claim at 62 by 30%, and each year of waiting past 67 adds 8%, up to 70. Leveling and a late claim pull in opposite directions: one moves pension income earlier, the other moves Social Security later.

When does the leveling option fit?

It fits a member who will claim Social Security at 62, wants steady income from the first day of retirement, and has no spouse to provide for after death. It fits less well when:

• a spouse would need income after you die, since leveling is single-life;
• you plan to delay Social Security past 62;
• you expect a long retirement, since the regular pension pulls ahead in the 2014 example at about 70.

How does the choice fit the rest of a plan?

The extra pension before 62 is taxable income in the years that often suit Roth conversions, so it uses bracket room a conversion might need. For a married couple, the claiming age also sets what a surviving spouse receives, as the answer on when each spouse should claim explains. A plan sets the pension option, the claiming age and the withdrawal order together, since each one changes the others.

What should you do next?

Ask TCRS for both amounts, the Member Only pension and the leveled one, and get your Social Security estimates at 62, at full retirement age and at 70 from your my Social Security account. Settle your claiming age first, then pick the payout option that matches it. Schedule a consultation to see both options against the rest of your income.