Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
1
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Social Security Benefits
create a vital social “safety net” by providing at least a
minimal income flow to disabled or retired workers or to
survivors 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
Copyright 2009, The National Underwriter Company
2
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
3
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Social Security Beneficiary Data – Dec. 2006
Who
Receives
Number
Total Amount
Retired
workers
31 million
$31 billion
Dependents
of retired
3 million
$1.5 billion
Disabled
workers
6.8 million
$6.1 billion
Dependents
of disabled
1.8 million
$0.5 billion
Survivors
6.5 million
$5.7 billion
Avg. Monthly
Benefit
$1,044
Copyright 2009, The National Underwriter Company
$833
$895
4
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
5
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Eligibility
A quarter is a calendar quarter; a 3 month period
ending:
Mar 31
Jun 30
Sept 30
Dec 31
In 2009 – workers received one quarter of coverage for
each $1,090 in earnings, up to maximum of 4 quarters
Copyright 2009, The National Underwriter Company
6
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
7
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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 determines
if you have:
– fully insured status
– currently insured status
– insured status for establishing disability
Copyright 2009, The National Underwriter Company
8
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Those fully insured can receive
– retirement benefits
– disability benefits
Copyright 2009, The National Underwriter Company
9
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
10
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Family of those currently insured at death of insured
can receive:
– child’s benefits
– mother’s or father’s benefits
– lump sum death payment
Copyright 2009, The National Underwriter Company
11
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
12
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Retirement
Must
•
be fully insured
•
be at least age 62 throughout the first month of
entitlement
•
have filed application for retirement benefits
Copyright 2009, The National Underwriter Company
13
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Normal Retirement Age Is gradually increasing
Birth Year
< 1937
1938
NRA
65
65 & 2 mo.
Birth Year
1955
1956
NRA
66 & 2 mo.
66 & 4 mo.
1939
1940
1941
65 & 4 mo.
65 & 6 mo.
65 & 8 mo.
1957
1958
1959
66 & 6 mo.
66 & 8 mo.
66 & 10 mo.
1942
1943-54
65 & 10 mo.
66
> 1960
67
Copyright 2009, The National Underwriter Company
14
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Retirement
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
Copyright 2009, The National Underwriter Company
15
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Retirement
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
Copyright 2009, The National Underwriter Company
16
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
coverage
Source: Social Security Administration; www.ssa.gov
Copyright 2009, The National Underwriter Company
17
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
18
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
19
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
20
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Spouse’s Benefit
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
Copyright 2009, The National Underwriter Company
21
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Spouse’s Benefit
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
Copyright 2009, The National Underwriter Company
22
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Spouse’s Benefit
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
Copyright 2009, The National Underwriter Company
23
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
24
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Survivor 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”
Copyright 2009, The National Underwriter Company
25
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Survivor Benefits
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
Copyright 2009, The National Underwriter Company
26
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Survivor 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)
Copyright 2009, The National Underwriter Company
27
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Survivor Benefits
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
Copyright 2009, The National Underwriter Company
28
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Survivor 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
Copyright 2009, The National Underwriter Company
29
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Benefits: Survivor Benefits
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)
Copyright 2009, The National Underwriter Company
30
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
31
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
32
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Maximum Family Benefits
Maximum family benefit for those who reach age 62 or
die in 2009:
(1)
(2)
(3)
(4)
150% of the first $950 of PIA, plus
272% of PIA over $950 through $1,372 plus
134% of PIA over $1,372 through $1,789, plus
175% over $1,789
Maximum is subject to increases based on wage levels
Copyright 2009, The National Underwriter Company
33
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
34
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Delayed Retirement Credit
• Workers continuing on the job receive an  in retirement 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
Copyright 2009, The National Underwriter Company
35
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
36
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
37
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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
Copyright 2009, The National Underwriter Company
38
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Income Taxation of Social Security Benefits
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
Copyright 2009, The National Underwriter Company
39
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Income Taxation of Social Security Benefits
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
Copyright 2009, The National Underwriter Company
40
Social Security
Chapter 3
Employee Benefit & Retirement Planning
Income Taxation of Social Security Benefits
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
Copyright 2009, The National Underwriter Company
41
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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.
Copyright 2009, The National Underwriter Company
42
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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.
Copyright 2009, The National Underwriter Company
43
Social Security
Chapter 3
Employee Benefit & Retirement Planning
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.
2.
3.
4.
raise payroll tax a small amount (e.g. 1/2%)
include newly hired state and local workers in system
raise maximum wages subject to Social Security
gradually increase age for full benefits to 70
Discuss the pros and cons of each proposal
Copyright 2009, The National Underwriter Company
44