Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 Social Security covers: –most private

Social Security Chapter 3Employee Benefit & Retirement Planning

Copyright 2009, The National Underwriter Company 1

Social Security covers:– most private sector employees– most self-employed– members of the US Armed Forces

Social Security excludes:– Federal employees hired before 1984– certain state and local employees– railroad employees covered under the Railroad Retirement

System



Social Security Benefits

create a vital social “safety net” by providing at least aminimal income flow to disabled or retired workers or tosurvivors of deceased worker

Benefits – retirement– disability– spouse’s benefit– survivor’s benefit

• mother’s or father’s benefit• child’s benefit• widow or widower’s benefits



Social Security Facts

96% of all workers are covered under Social Security

- 53% of workforce has no private pension coverage- 32% of workforce has no savings set aside

specifically for retirement

More than 9 in 10 of those aged 65 and older receive Social Security benefits

- for 2/3 it is more than 50% of retirement income- for 22% it is ONLY source of income

Source: Social Security Administration; http://www.ssa.gov



Social Security Beneficiary Data – Dec. 2006

Who Receives

Number Total AmountAvg. Monthly

Benefit

Retired workers

31 million $31 billion

$1,044 Dependents

of retired3 million $1.5 billion

Disabled workers

6.8 million $6.1 billion$833

Dependents

of disabled1.8 million $0.5 billion

Survivors 6.5 million $5.7 billion $895



Eligibility

Most Social Security benefits require a person to be

fully insured

or

currently insured

A person becomes insured by acquiring a certain number of quarters of coverage



Eligibility

A quarter is a calendar quarter; a 3 month period ending:

Mar 31Jun 30Sept 30Dec 31

In 2009 – workers received one quarter of coverage for each $1,090 in earnings, up to maximum of 4 quarters



Eligibility

Can acquire quarters before age 21 or after retirement age A calendar quarter cannot be a quarter of coverage if

– it begins after the calendar quarter in which a person died– it has not yet started – it is with a period of disability excluded from figuring benefit

rights

quarters determine insured status, not size of Social Security benefit



You must be insured under Social Security before you or your family can receive:

– Survivors income– Disability income– Retirement income

Number of quarters of coverage determinesif you have:

– fully insured status– currently insured status– insured status for establishing disability



Those fully insured can receive

– retirement benefits

– disability benefits



Fully Insured

• have 40 quarters of coverage

OR

• have at least 6 quarters of coverage

and

• acquired at least as many quarters of coverage as years elapsing after reach age 21 and before year die, become disabled, or reach age 62, whichever is first



Family of those currently insured at death of insured can receive:

– child’s benefits

– mother’s or father’s benefits

– lump sum death payment



Currently Insured

has acquired at least 6 quarters of coverage during the

full 13-quarter period ending with the calendar quarter

in which person – died– most recently became entitled to disability benefits– become entitled to retirement benefits

The 6 quarters need not be consecutive, but must

be during a 13 quarter period



Benefits: Retirement

Must

• be fully insured

• be at least age 62 throughout the first month of entitlement

• have filed application for retirement benefits



Normal Retirement Age Is gradually increasing

Birth Year NRA Birth Year NRA

< 1937 65 1955 66 & 2 mo.

1938 65 & 2 mo. 1956 66 & 4 mo.

1939 65 & 4 mo. 1957 66 & 6 mo.

1940 65 & 6 mo. 1958 66 & 8 mo.

1941 65 & 8 mo. 1959 66 & 10 mo.

1942 65 & 10 mo. > 1960 67

1943-54 66




Reduced benefits available at age 62, but revised reduction factor will result in less available for future early retirees than for current retirees

Generally, those who take reduced retirement benefits before normal retirement age ( NRA) will continue to have reduced benefits after NRA




An on-line calculator for - NRA- percentage reduction for early retirement

for self and spouse - percentage increase for delayed retirement

for self and spouse is available at: http://www.ssa.gov/OACT/ProgData/nra.html



Disability Facts

• Disabled workers and their dependents account for 17% of total Social Security Benefits paid

• about 91% of workers age 21-64 in covered employment; giving families protection under Social Security in event of severe long term disability

• 30% of today’s 20-yr olds will be disabled before age 67• 72% of private sector workforce has no long term disability

coverageSource: Social Security Administration; www.ssa.gov



Benefits: Disability

Worker entitled if– insured for disability benefits

– under age 65

– has been or is expected to be disabled for 12 months or has terminal condition

– filed application for benefits

– has completed 5 month wait or is exempt from wait



Benefits: Disability

Disability payments use different formulas than those used for a retiring worker

Family benefit limits for disabled worker differ from family benefit limits for retiring worker



Benefits: Spouse’s Benefit

Spouse entitled if

– worker entitled to retirement or disability benefits

– spouse filed application for spouse benefits

– spouse not entitled to retirement or disability benefit based on PIA > 1/2 worker’s PIA

– spouse age 62; or caring for child < 16; or disabled




Spouse of worker must also meet ONE of these conditions:

– married worker > 1 year before applying for benefits– be natural mother or father of worker’s child– entitled or potentially entitled to spouse’s, surviving

spouse’s, parent’s, or childhood disability benefits OR annuity under Railroad Retirement Act in month before month of marriage to worker




Spouse entitled to divorced spouse benefit IF:– worker entitled to retirement or disability benefits– applied for divorced spouse’s benefits– would receive more under spousal retirement or disability

benefit than on own work record– > age 62– not married– married to worker > 10 years before divorce final




If caring for worker’s < age 16 or disabled child, monthly benefit = 50% worker primary insurance amount (PIA) regardless of age

If not caring for child

monthly benefit = 50% worker PIA at NRA

Early retirement means reduced benefit



Benefits: Survivor Benefits

Mother’s or Father’s Benefits – entitled IF– caring for child < 16 or disabled before age 22– child is survivor’s own or adopted child– surviving spouse unmarried– no widow’s or widower’s benefit is available– no retirement available on surviving spouse’s work record

> mother’s or father’s benefit– application filed for benefits




Mother’s or Father’s Benefits– benefit amount = 75% of deceased spouse’s PIA– family maximum may limit benefit– divorced spouse’s benefit is same as married, but not

subject to family maximum– benefits cease when youngest child > 16, “black out”




Child’s Benefits– must meet relationship requirements of fully or

currently insured deceased worker– be < 18 or > 18 and disabled before age 22 or <

19 and full-time elementary or secondary student– not married– dependent upon deceased parent– file application for benefits




Child’s Benefits– benefit amount = 75% of deceased worker’s PIA– family maximum may limit benefit– benefits end

• at death

• age 18

• disability ceases

• if marry (unless disabled)




Widow or Widower’s Benefits – entitled IF– surviving spouse is age 60 or over, or is at least age 50 but

not age 60 and is disabled– worker died fully insured– surviving spouse’s own retirement benefit not greater than

what would receive under worker’s benefit– application filed for benefits




Widow or Widower’s Benefits – entitled IF meet one of following conditions

– married 9 months to deceased (except in case of accidental death)

– biological or adoptive parent of deceased’s child < 18– entitled or potentially entitled to dependent benefits

under Railroad Retirement Act in month before month surviving spouse married deceased worker




Widow or Widower’s Benefits

– if surviving spouse is NRA or older when benefits begin benefit = 100% deceased worker’s PIA

– if worker received benefits before NRA, surviving spouse benefit = reduced benefit worker would have received if had lived (not less than 82.5% of PIA)



Computing Benefits

Primary Insurance Amount (PIA) is basis for determining amount of each monthly social security benefit.

Benefit = PIA for disabled worker worker who retires at normal retirement age

Benefit = % PIA for worker who retires before normal retirement age dependents survivors



Computing Benefits

Amount of each monthly benefit payable under Social Security is based on the worker’s Primary Insurance Amount (PIA)

Social Security Administration calculates a worker’s PIA using formulas based on a person’s Average Indexed Monthly Earnings (AIME), which is basically their (inflation adjusted) earnings history

Can only credit earnings below Social Security wage base - $106,800 in 2009



Maximum Family Benefits

Maximum family benefit for those who reach age 62 or die in 2009:

(1) 150% of the first $950 of PIA, plus(2) 272% of PIA over $950 through $1,372 plus(3) 134% of PIA over $1,372 through $1,789, plus(4) 175% over $1,789

Maximum is subject to increases based on wage levels



Cost-of-Living Increases

• automatic

• determined by increases in Consumer Price Index for All Urban Wage Earners and Clerical Workers prepared by U.S. Department of Labor



Delayed Retirement Credit

• Workers continuing on the job receive an in retire-ment benefits for each year worked age 65 to 70– NOT an increase in worker’s PIA– benefits based on PIA are NOT affected

• Amount of increase varies, depending on year reach 62

• For 2005 forward, delay in receipt of Social Security benefits past NRA increases benefits 2/3 of 1% each month until maximum reached at age 70



Working After Retirement

• Lose benefits if retire before NRA and exceed earning limits– if under NRA for all of 2009 and earn over $14,160 lose $1 for

every $2 in earnings over $14,160

– if reach NRA in 2009 and earn over $37,680 lose $1 for every $3 in earnings over $37,680

• If retire at NRA or older, NO benefits lost due to earnings



Working After Retirement

To determine amount of benefits lost, must consider

1. amount of excess earnings for year

2. months in the year that can be charged with all or part of excess earnings that are potentially chargeable against benefits



Income Taxation of Social Security Benefits

If total of person’s income plus 1/2 of his or her benefits is more than a base amount, some of the benefits are taxable

Total income includes– tax-exempt interest income– excludable interest from US savings bonds– excludable income earned in foreign country, US

possession, or Puerto Rico




Base amount depends on person’s filing status:

– $32,000 for married filing jointly

– 0 for married filing separately if lived together at any time during the year

– $25,000 for other taxpayers




50 percent taxable

If income plus 1/2 Social Security > base amount, up to 50% of benefits included in gross income

Base amount:– $32,000 for married filing jointly– $0 for married filing separately, lived together during year– $25,000 for all other taxpayers




85 percent taxable

If income plus 1/2 Social Security > base amount, up to 50% of benefits included in gross income

Base amount:– $44,000 for married filing jointly– $0 for married filing separately, lived together during year– $34,000 for all other taxpayers



True or False?

1. Social Security was designed to serve as an adequate retirement plan for those with no other retirement savings.

2. Persons who are fully insured status can receive disability benefits while those only currently insured cannot.

3. Jack, age 62, has a 40-year old wife who has never been employed. Jack’s wife can receive spouse’s benefits when Jack begins receiving Social Security later this year.



True or False?

4. A surviving spouse of a currently insured worker receives Social Security based on the deceased’s earnings record until they die or remarry.

5. The family maximum for Social Security benefits can, in some cases, be less than 100% of the benefit that would have been paid to the worker alone.

6. Those who work past age 65 receive an increase in retirement benefits for each year worked between age 65 and 70.



Discussion Question

As the Baby Boom generation reaches eligibility for Social Security, concern for the continued solvency of Social Security exists. Proposals to ensure continuance of Social Security include:

1. raise payroll tax a small amount (e.g. 1/2%)

2. include newly hired state and local workers in system

3. raise maximum wages subject to Social Security

4. gradually increase age for full benefits to 70

Discuss the pros and cons of each proposal

Documents

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 Social Security covers: –most private