1
Retirement Planning and
Employee Benefits for
Financial Planners
Chapter 11: Social Security
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Benefits Available
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Retirement Benefits
Disability Benefits
Family Benefits
Survivors’ Benefits
Medicare
Supplemental Social Security
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Social Security

Inadequate funding of Social Security
 Ratio of workers to beneficiaries
 1950 16:1; 1960: 5.1 to 1; 2004:3.3 to 1, 2025:2.3 to
1
 Currently 55 million getting $1,077 average monthly
check
 Retirement life expectancy
 1935: 65 to receive benefits; life expectancy 62
years
 2008: benefits as early as 62, life expectancy 80+
 Number of workers
 Where’s the money?
 Used to pay current benefits
 Excess invested in $1.5 trillion in Treasury bonds
 Surplus projected until 2017
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Social Security
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Social Security
 Inadequate funding of Social Security
 2010 report of trustees
 Social Security will exhaust funds in 2037
 Will only be able to pay 75% of benefits
 Solutions
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Increase taxes by 2.15%
Tax all wages
Immediately reduce benefits 14%
Make $5.3 trillion contribution to trust fund
Keep COLA at inflation – 1% (eliminates 75% of shortfall)
Raise retirement age to 70 (eliminates 33% of shortfall)
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Social Security
 Inadequate funding of Medicare
 2010 report of trustees
 Medicare will exhaust funds in 2029
 Solutions
 Increase taxes by 1%
 Immediately reduce benefits 17%
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Social Security Taxes and
Contributions

Federal Insurance Contributions Act (FICA)
 Collected through payroll taxes
 Total taxes of 7.65%
 6.2% up to $110,100 of compensation (OASDI)
 4.2% in 2012
 1.45% of total compensation (HI)
 An additional .9% HI for compensation above $250,000 MFJ
beginning in 2013
 Unearned income above $250,000 MFJ is subject to a 3.8%
HI tax beginning in 2013
OASI Trust Fund
5.30% up to $110,100 (2012)
DI Trust
0.9% up to $110,100 (2012)
HI Trust
1.45% (all compensation)
SMI Trust
Funded by general tax revenue
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Qualifying for Social Security
Benefits
 Fully Insured
 40 quarters of coverage
 A quarter of coverage = $1,120 for 2012
of earnings
 Maximum accrual of 4 quarters per year
 Currently Insured
 6 quarters of coverage out of the
previous 13 quarters
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Qualifying for Social Security
Benefits
 Not covered by Social Security
 Family employees
 Child under 18
 Not in trade or business
 Railroad employees
 Ministers
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Social Security Beneficiaries
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Participant Worker
Participant’s Spouse
Participant’s Children
Dependent Parents
Workers Divorced Spouse
Married)
(10+ Year
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Social Security Retirement
Benefits
 Retirement benefit payable at retirement
 Fully Insured Retirees
 Normal Retirement Age is increasing
 Currently 66 years. Will increase to age 67 in
2027
 Increased benefit for delayed retirement
 Retirement BEYOND normal retirement age
 Decreased benefit for early retirement
 Retirement BEFORE normal retirement age
 Monthly benefits increase each year based on COLA
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Calculating the Retirement
Benefit (1 of 3)
 Calculate the worker’s Average Indexed
Monthly Earnings (AIME)
 Convert earnings after age 21 to current
dollars using an indexing factor.
 Earlier earnings, higher factor
 Sum the highest 35 years
 Divide sum by 420 months
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Calculating the Retirement
Benefit (2 of 3)
 Calculate the worker’s Primary
Insurance Amount (PIA)
 Sum of three separate percentages of the AIME
 90% of the first $767 (2012)
 32% of the AIME over $767 and less than $4,624
(2012)
 15% of the AIME that exceeds $4,624 (2012)
 Consequently, workers with lower income will receive
a much higher percentage of their wages in social
security benefits
 Low income workers: social security 60% of
retirement income
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Calculating the Retirement
Benefit (3 of 3)
 Worker would receive PIA.
 Maximum PIA = $2,461 (2012)
 A beneficiary of the worker may receive a
percentage of the PIA:
 Spouse w/child under 16: 50%
 Spouse, age 65: 50%
 Spouse can receive benefits based on her PIA if it is
greater
 Spouse, under age 60: none
 Child under 18, 50%
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Calculating the Retirement
Benefit (3 of 3)
 Deceased worker
 A beneficiary of the worker may receive a
percentage of the PIA:
 Spouse w/child under 16: 75%
 In general, must be married nine months at time of
death but exceptions to rule exist
 Spouse, age 65: 100%
 Spouse can receive benefits based on her PIA if it is
greater
 Spouse, over age 60,: 71.5%
 Child under 18, 75%
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Early Retirement
 May begin at age 62.
 Permanently reduced benefit:
 Currently receive 75% of normal retirement
benefits
 But nearly 50% elect to retire at age 62
 Almost 70% elect to receive benefits before
normal retirement age
 By 2027, receive only 70% of normal retirement
benefits
 Journal of Financial Planning, Jan. 2004
 Breakeven generally occurs at age 73-74
 70 – 80% likelihood of someone age 62 living to age
74
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Delayed Retirement


Begin taking retirement distributions after normal retirement
age.
Permanent increased benefit.
 Increases the benefit by 8% for each year of delayed
retirement from normal retirement (age 65, 10 months)
until age 70.
 Consequently, benefits increased by 32% if wait until age
70 to begin collecting benefits

Consequently, often recommended strategy

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Higher income spouse delay until age 70

Increase his suspended benefits, but spouse can draw 100%
normal retirement benefits
Lower income spouse take at age 62

Switch to spousal benefits at death of spouse
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Retirement Earnings Limitations
Test (1 of 2)
 Social Security Retirement benefits are
reduced for early-retirees who have
earnings from continued employment.
 Earnings
 Wages
 Self-Employment Income
 NOT Earnings
 Pension Income
 Investment Income
 Capital Gains
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Retirement Earnings Limitations
Test (2 of 2)
 Before normal retirement age and collecting Social
Security:
 $1 reduction for every $2 of earnings above
$14,640 for 2012 if don’t reach full retirement age
in 2012
 $1 reduction for every $2 of earnings above
$38,880 for 2012 if do reach full retirement age in
2012
 Don’t take Social Security early if plan to continue
to work
 After attaining normal retirement age, $0 reduction.
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Taxation of Social Security
Benefits (1 of 3)
 Retirees with substantial income in addition to Social
Security benefits.
 Up to 85% of the Social Security benefits may be
taxable
 Modified AGI (MAGI)
 AGI + Nontaxable Interest + Foreign Earned
Income
MFJ
Single
1st Hurdle
$32,000
$25,000
2nd Hurdle
$44,000
$34,000
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Taxation of Social Security
Benefits (2 of 3)
 Second Hurdle > MAGI + ½ of Social
Security Benefits > First Hurdle, the
taxable amount of the Social Security
Retirement benefits is the lesser of:
 50% of Social Security Benefits, or
 50% [MAGI + 0.50 (Social Security
Benefits) less Hurdle 1 Value]
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Taxation of Social Security
Benefits (3 of 3)
 MAGI + ½ of Social Security Benefits > Second Hurdle,
the taxable amount of the Social Security benefits is the
lesser of:
 85% of Social Security Benefits, or
 85% [MAGI + 0.5(Social Security Benefits) less
Hurdle 2], plus the lesser of:
 $6,000 for MFJ, or $4,500 for all other taxpayers,
or
 The taxable amount calculated based on the 50%
formula and only considering Hurdle 1
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Disability Benefits
 Benefits payable to workers with:
 Severe physical or mental impairments
which prevents them from performing
“substantial work.”
 Cannot perform any gainful work.
 Payable at any age.
 Fully insured with 20 quarters of
coverage in the last 40 quarters.
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Family Benefits
 Benefit payable to family members of
worker receiving retirement benefits or
disability benefits.
 Spouse
 62 and older
 Caring for a child under age 16
 Caring for a child who was disabled before age
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 Unmarried Child
 Under 18
 Under age 19 and in high school
 Age 18 or older and disabled before age 22
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Survivors Benefits
 Benefits payable to family members of deceased
individuals who were entitled to benefits.
 Widow or Widower
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
60 and older
Over 50 and disabled
Caring for a child under age 16
Caring for a child who was disabled before age 22
 Unmarried Child
 Under 18
 Under age 19 and in high school
 Age 18 or older and disabled before age 22
 Dependent parents of the deceased worker
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Death Benefit
 One-time $255 death benefit
payment
 Paid to deceased worker’s surviving
spouse, or minor child (if no spouse).
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Maximum Family Benefit
 Limit on the amount of monthly Social
Security benefits paid to the family of a
deceased worker.
 Based on the deceased worker’s PIA.
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Medicare Benefits
 Federal health plan for:
 People 65 and older
 Disabled individuals
 Individuals with permanent kidney
failure
 Consists of:
 Hospital Insurance - Medicare Part A
 Medical Insurance - Medicare Part B
 Prescription Drug – Medicare Part D
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Medicare
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Hospital Insurance – Medicare
Part A
 Covers
 Hospital Coverage, and
 Skilled Nursing Care
 Deductible for inpatient hospital care:
 $1,156 deductible per illness for 2012
 for the first 60 days
 $289 for 2012 per day for days 61-90, and
 $578 for 2012 per day for days in excess of 90.
 Skilled nursing care deductible $145 for 2012 per day
for 21st day to 100th day.
 Coinsurance based on benefit period
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Medical Insurance – Medicare
Part B
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

Individuals pay monthly premium.
 Increases based on AGI
 $100/mo if AGI < $170,000; $320/mo if AGI >
$428,000
Covers 80% of:
 Doctor’s Services
 Ambulance Transportation
 Diagnostic Tests
 Outpatient Therapy Services
 Outpatient Hospital Services
 Medical Equipment and Supplies
$140 annual deductible in 2012.
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Prescription Drug – Medicare
Part D
 Began January 1, 2006.
 Insurance coverage for prescription
drugs.
 Participant must enroll and pay a
monthly premium and a portion of
each prescription.
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Supplemental Security Income
 Monthly payments to individuals with
low income and few assets:
 65 and older
 Disabled
 Blind
 Single: $698 per month for 2012.
 Married: $1,048 per month for 2012.
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Effect of Marriage or Divorce on
Benefits
 Worker receiving benefits based on his
own earnings
 Benefits continue regardless
 Individual’s receiving benefits based on
spouse’s earnings
 Benefits cease at divorce, unless
 Individual is 62 or older and was married
longer than 10 years
 Widows and Widower benefits
 Benefits cease at remarriage unless 60 or older