April 22 Ch 20 - Social Security and
Social Security Benefits
** Notes are using 2014 & 2015 numbers for benefits and maximums – Pages 9-11 of this hand
Cola 1.4% for 2014 Cola 1.7% for 2015
Social Security and Social Security Benefits

Overview of the Social Security System
Six major categories of benefits
 Retirement benefit – receive as early as age 62, full retirement was age 65 in 2000
increases to age 67 by 2027
 Disability benefit – employed 20 out of 40 quarters, out of work for
12 months or result in death, any occupation, 5 month Elimination period
 Family benefit  Survivors benefits – survivors of deceased - $255 one time
 Medicare – eligible 65 & older fed health insurance
 Supplemental Security Income (SSI)
Social Security Taxes and Contributions
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Funding
Individual
5.3%*
OASI Trust Fund – Old Age Survivor
Old Age and Survivors Insurance Trust Fund
DI Trust Fund – Disability Income
.9%
Disability Income Trust Fund
HI Trust Fund – Health Insurance (Medicare)
1.45%
Health Insurance Trust Fund
SMI Trust Fund – Supplemental Medical Insurance 0
FICA-Med 7.65%
Self Employed
OASI + DI = 12.4%
2.9%
0
15.3%
FICA = Federal Insurance Contribution Act – allows Social Security taxes to be taken from pay
checks
Above are Trust Accounts set up for Social Security benefits - funding sources come from
working people’s FICA contribution.
SMI Trust Fund – Pays Medicare Part B – funded by premiums of retirees and the US Treasury.
2014 OASDI $117,000 (6.2%) – no limit on Medicare tax (1.45)
2015-2016 OASDI $118,500 (6.2%) – no limit on Medicare tax (1.45)
[Problem 2]
1
Employer matches employee’s contribution
Social Security Tax Dollars are spent
Retirement and Survivors Benefits
Medicare
Disability
Administrative Costs
68%
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1
Social Security Benefits – Eligibility and
Calculations
- Worker must be fully insured – workers earned number of quarters under the Social Security
system by paying FICA – earn quarters by earning a designated amount of money regardless
when it was earned
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Covered workers and insured status – 40 qtrs fully covered [1 quarter of coverage is earning
2014 - $1200 per qtr $4,800 annual, 2015-2016 - $1220 per qtr $4,880 per year]
Currently insured - covered 6 of last 13 qtrs
Disability benefits are available if fully insured, over age 31 and have coverage for 20 of last
40 quarters – if before age 24 covered 6 of last 12 quarters. Age 24-30 must be covered half
of quarters since age 21.
Social Security beneficiaries – disabled insured worker, retired insured at age 62, spouse of
retired or disabled insured worker if at least 62 or caring for child under 16 or disabled child,
divorced spouse, dependent parents
The Social Security Statement
 Form SSA-7005 – sent to all workers 25 and older by SS admin
The Retirement Benefit Calculation –
AIME – Average Indexed Monthly Earnings
The AIME is found by indexing each year’s earnings to current dollars. The wages are
indexed to dollars in the year the worker turns age 60.
Example: A worker has turned 62 and benefit eligible in 2004. He was age 60 in 2002 so the
national average wage for 2002 is $33,252.09 (p.378). For instance, at age 28 he earned $5,000
which was in 1970. The factor used to convert the 1970 wages to current dollars is found by
dividing the $33,252.09 by the national average wage in 1970 ($6,186.24) so 33,252.09/6186.24
= 5.37517. This factor is multiplied times the workers 1970 wages to convert them to current
dollars so $5,000 * 5.37517 = $26,876
2
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This is done for each year of earnings from age 22-62 and the highest 35 years are
summed and divided by 420 (35 years * 12 months per year). This equals AIME.
PIA – Primary Insurance Amount
PIA is the actual Social Security monthly benefit for a retiree who reaches full retirement age.
The AIME is used to calculate it. The PIA is the sum of three portions of the AIME divided
by two bend points
a) 90 percent of the first $816 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $826 and through
$4,980, plus
(c) 15 percent of his/her average indexed monthly earnings over $4,980.
Bend Points
2009
744
4483
2010
761
4586
2011
749
4517
2012
767
4624
2013
791
4,768
2014
816
4,917
2015
826
4,980
2016
826
4,980
PIA for 2016 Individual has AIME $6,000
2016 PIA
.90 * 826 + (4,980-826 * .32) + .15 * (6,000 – 4,980) = $2,226
Old Age Coverage
Retirement Benefits
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Receive full benefit if take benefit at normal retirement age
Reduced benefits if take benefits before normal retirement age – may retire as early as 62
years old and receive reduced payment.
Take benefits after normal retirement age and receive increased benefits until age 70.
Spouse can receive benefits based on worker’s retirement benefit (starting at age 62) if the
worker is retired and drawing benefits.
Divorce spouse (did not remarry and at least age 62) married for 10 years or more, can draw
retirement benefits on spouse’s work record if worker is eligible to draw Social Security
benefits (worker does not have to draw).
Reduction of Social Security Benefits
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Besides early retirement there are two other ways to have benefits reduced
3
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Retirement Limitations Test – applies to people drawing benefits before the full
retirement age. Only earned wages count.
Earnings limit for 2008 = $13,560
Earnings limit for 2009 = $14,160
Earnings limit for 2009 = $14,160
Earnings Limit for 2010=$14,160
Earnings Limit for 2011=$14,160
Earnings Limit for 2012=$14,640
Earnings Limit for 2013=$15,120
Earnings Limit for 2014=$15,480
Earnings Limit for 2015=$15,720
Earnings Limit for 2016=$15,720
One dollar of retirement benefits is deducted for each two dollars the retiree earns above $15,720
before full retirement age.
For example, if Eddy retires at age 63 and earns $16,000 (earned wages – not interest, dividends
etc.) and has $1100 per month or $13,200 per year in retirement benefits from Social Security, he
would see the following.
2016
Earned Wages
$16,000
Soc. Sec. Earnings Max
15,720
Excess
$ 280
.50 * 280 = $140 in reduction in benefits for the year or $13,200 - $140 = $13,060.
His monthly Social Security check drops to $13060/12 = $1,088
[Exercise 7]
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Some may have to pay tax on Social Security benefits. It may be as high as 85% of the
benefits get taxed
Taxation of Social Security Benefits
For persons with substantial income in addition to Social Security benefits, up to 85% of their
annual benefits may be subject to federal income tax.
 Modified Adjusted Gross Income – on the 1040 federal tax return, the sum of adjusted gross
income, nontaxable interest, foreign-earned income, and ½ of Social Security benefits.
$
25,000 < Single Person’s Modified AGI < $34,000
Up to50% of SS may be subject to tax (>$34 K 85% of SS)
$ 32,000 < Married Filing Jointly Mod AGI < $44,000
Up to 50% of SS may be subject to tax (>$44 K 85% of SS)
[Problems 3,5]
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4
Other Social Security Benefits
Disability – severe enough impairment so
the recipient cannot perform substantial work (2011-$1000 2012 $1010 or more monthly) for at
least a year
* Disability benefits are available if fully insured and if over age 31 and have coverage a total of
at least 20 of the last 40 quarters covered
 Disability benefits are available before age 24 if covered 6 of last 12 quarters. Age 24-30
must be covered half of quarters since age 21.
* will be out of work for 12 months or result in death
* any occupation
* 5 month Elimination period
If receive disability benefits from Social Security for at least 2 years, then qualify for medicare.
May qualify for SSI – Supplemental Security Income
The Family Benefit
Individual is eligible for retirement or disability benefits
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spouse may receive benefits if at least 62 years old or under age 62 but caring
for child under 16 years old
child – unmarried and under age 18 or under 19 but still in elementary or
high school or disabled before age 22.
The Maximum Family Benefit is the limit on the amount of monthly Social Security benefits
that may be paid to a family. No more than 150-180% of workers PIA. Worker still
receives total benefits if living.
Survivor Benefits
Family members entitled to survivor benefits
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Widow(er) age 60 or older (age 50 if disabled) or if caring for child under 16 years or
disabled (age 60 reduced benefits 71.5% of PIA)
Child of deceased worker, child unmarried and under age 18, under age 19 if in school, or 18
or older but disabled (disabled before age 22) – 75% PIA
Parents (age 62 or older) of deceased worker if worker was primary means of support (82.5%
of PIA for one parent or 75% for each parent)
$255 death benefit – goes to spouse
Survivorship benefits for divorce spouse (married at least 10 years) if remarried after age 60
– divorced spouse can receive survivor benefits at age 60 as well if did not remarry
[Exercises 1, 3]
5
Medicare Benefits –
A benefit period lasts from the first day the patient receives services as a patient and ends after
60 consecutive days of no further skilled service.
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Medicare is a federal health insurance plan for people who are 65 and older, whether
retired or still working
There are two parts to Medicare:
 Hospital Insurance (Part A) – pays up to 90 days of inpatient hospital care during benefit
period.
 Medical Insurance (Part B) – Pays for doctor’s services, ambulance, X-rays, lab, hearing,
eye exams, dental
Part B is optional and a premium is charged
Part C - Medicare Supplemental (Medigap, Medicare Advantage) – supplemental – pays
deductible, coinsurance, out of pocket expense, Private companies sell it.
* Part D – Prescription Drugs
* Medicaid – provides medical assistance for low income people
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Disabled people receiving benefits for at least two years automatically qualify for medicare.
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Spouses at age 65 can qualify for Medicare Part A using working spouse’s record if working
spouse is eligible to draw monthly retirement benefits or is receiving Social Security
disability benefits. (file 3 months before 65th birthday)
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Those who are age 65 and receiving Social Security retirement benefits or survivor
automatically qualify for medicare (don’t have to apply). Everyone else must apply for
medicare.
SSI – Supplementary Security Income
SSI - Supplemental Security Income –
 Must be age 65 or disabled or blind
 Low income and few assets.
 Funded by general Treasury (tax revenues) not by FICA
Other Social Security Issues
* COLA – cost of living adjustment is applied to Social Security benefits based on the
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CPI
Effect of marriage or divorce on benefits
Change of name
Leaving the United States – does not effect benefits – will send checks to you
o
For one-third of Americans over 65, Social Security benefits constitute 90% of their total income
Background on Problems with Social Security
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Social Security is sound for today’s seniors and for those nearing retirement, but it needs to be fixed
for younger workers – our children and grandchildren. The government has made promises it cannot afford to
pay for with the current pay-as-you-go system.
o
In 1950, there were 16 workers to support every one beneficiary of Social Security.
o
Today, there are only 3.3 workers supporting every Social Security beneficiary.
o
In 2008 – just three short years from now – baby boomers will begin to retire. And over the next few
decades, people will be living longer and benefits are scheduled to increase dramatically. By the time
today’s youngest workers turn 65, there will only be 2 workers supporting each beneficiary.
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If we do not act to fix Social Security now, the only solutions will be dramatically higher taxes,
massive new borrowing or sudden and severe cuts in Social Security benefits or other government
programs.
o
Just 13 years from now, in 2017, the government will begin to pay out more in Social Security
benefits than it collects in payroll taxes – and shortfalls then will grow larger with each passing year.
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Under the current system, today’s 30-year-old worker will face a 27% benefit cut when he
or she reaches normal retirement age.
By the year 2027, the government will somehow have to come up with an extra $200
billion a year to keep the system afloat.
By 2033, the annual shortfall will be more than $300 billion a year.
By 2041, when workers in their mid-20s begin to retire, the system will be bankrupt –
unless we act now to save it.
To keep the promise of Social Security alive for our children and grandchildren, we need to fix Social
Security now once and for all. We cannot pretend the problem doesn’t exist. The fact is Social Security will go
broke when our young workers get ready to retire. Every year we wait the problem becomes worse for our children.
The Social Security program is unsustainable. It cannot pay future benefits without drowning
our children and grandchildren in debt and taxes. Social Security was suppose to run a deficit by
2016, just four years from now. It happened in 2010. In theory, the Social Security trust fund
will pay benefits until 2037, which should serve as cold comfort to today's 31-year-olds.
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But that figure is misleading because the trust fund contains no actual assets. The
government bonds it holds are simply a form of IOU, a measure of how much money the
government owes the system. It says nothing about where the government will get the money to
pay back those IOUs. Even if Congress can find a way to redeem the bonds, the trust-fund
surplus will be exhausted by 2037. Overall, the amount the system has promised beyond what it
can actually pay now totals $17.5 trillion. Yes, that's trillion with a T.
CALCULATION OF TAXABLE
SOCIAL SECURITY BENEFIT
Assuming Citizen A is retired. He has $30,000 in interest income and $29,197 in tax exempt
income. He is married filing jointly. His full Old Age Social Security benefit is $20,000
annually.
Modified AGI = Adjusted Gross Income + Tax Exempt Income + foreign earned income
1) Modified AGI (AGI + Tax Exempt Income) + 50% of Social Security Benefit =
+ Foreign Earned Inc
Provisional Income
(Interest) $30,000 + (Tax Exempt Income) $29,197 + [.50 * (Social Security) $20,000]
$10,000 =
(Provisional Income) $69,197
1) One half of excess provisional income (provisional income up to $44,000 – Married
Filing Jointly, $34,000 Single) over the first tier base of $32,000 ($25,000 Single) is
calculated. One half of that is subject to tax.
$44,000-$32000 = $12,000
$12,000 * .5 = $6,000
3) The amount the total provisional income exceeding $44,000 is multiplied by 85% and
added to the step (2).
$69,167-$44,000 = $25,167
$25,167*.85 =$21,391
$6,000 + $21,391= $27,391
4) The amount of Social Security benefit subject to tax is the lesser of the amount in (3) or
85% of the total Social Security benefit.
85% of Social Security Benefit = .85 * $20,000 = $17,000
$17,000 is less than $27,391 in (3) so $17,000 of Social Security is subject to tax.
Security information is as follows:
Tax Rate:
2014
2015
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Employee
Self-Employed
7.65%
7.65%
15.30%
15.30%
NOTE: The 7.65% tax rate is the combined rate for Social Security and Medicare. The
Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable
maximum amount (see below). The Medicare portion (HI) is 1.45% on all earnings.
Also, as of January 2013, individuals with earned income of more than $200,000
($250,000 for married couples filing jointly) pay an additional 0.9 percent in Medicare
taxes. The tax rates shown above do not include the 0.9 percent.
Maximum Taxable Earnings:
Social Security (OASDI only)
Medicare (HI only)
Quarter of Coverage:
2014
$117,000
Under full retirement age
NOTE: One dollar in benefits will be withheld for
every $2 in earnings above the limit.
The year an individual reaches full retirement age
NOTE: Applies only to earnings for months prior
to attaining full retirement age. One dollar in
benefits will be withheld for every $3 in earnings
above the limit.
$118,500
No Limit
2014
$1,200
Retirement Earnings Test Exempt Amounts:
2015-2016
2014
2015-2016
$1,220
2015-2016
$15,480/yr.
($1,290/mo.)
$15,720/yr.
($1,310/mo.)
$41,400/yr.
($3,450/mo.)
$41,880/yr.
($3,490/mo.)
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There is no limit on earnings beginning the month
an individual attains full retirement age.
Social Security Disability Thresholds:
Substantial Gainful Activity (SGA)
Non-Blind
Blind
Trial Work Period (TWP)
Maximum Social Security Benefit:
Worker Retiring at Full Retirement Age
SSI Federal Payment Standard:
Individual
Couple
SSI Resources Limits:
2014
2015-2016
$1,070/mo.
$1,800/mo.
$1,090/mo.
$1,820/mo.
$770/mo.
$ 780/mo.
2014
$2,642/mo.
2014
2015-2016
$2,663/mo.
2015-2016
$721/mo.
$ 733/mo.
$1,082/mo.
$1,100/mo.
2014
2015-2016
Individual
$2,000
$2,000
Couple
$3,000
$3,000
SSI Student Exclusion:
Monthly limit
2014
$1,750
2015-2016
$1,780
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Annual limit
Estimated Average Monthly Social Security
Benefits Payable in January 2015:
$7,060
Before
1.7% COLA
$7,180
After
1.7% COLA
All Retired Workers
$1,306
$1,328
Aged Couple, Both Receiving Benefits
$2,140
$2,176
Widowed Mother and Two Children
$2,635
$2,680
Aged Widow(er) Alone
$1,253
$1,274
Disabled Worker, Spouse and One or More
Children
$1,943
$1,976
All Disabled Workers
$1,146
$1,165
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Social Security Full Retirement and Reductions * by Age
Year of Birth
Note: Persons born on
January 1 of any year
should refer to the
previous year.
Full Retirement
Age 62
Monthly
Total %
Age
Reduction
%
Reduction
Months Reduction
1937 or earlier
65
36
.555
20.00
1938
65 and 2 months
38
.548
20.83
1939
65 and 4 months
40
.541
21.67
1940
65 and 6 months
42
.535
22.50
1941
65 and 8 months
44
.530
23.33
1942
65 and 10
months
46
.525
24.17
1943--1954
66
48
.520
25.00
1955
66 and 2 months
50
.516
25.84
1956
66 and 4 months
52
.512
26.66
1957
66 and 6 months
54
.509
27.50
1958
66 and 8 months
56
.505
28.33
1959
66 and 10
months
58
.502
29.17
1960 and later
67
60
.500
30.00
You can also retire at any time between age 62 and full retirement age. However, if you
start at one of these early ages, your benefits are reduced a fraction of a percent for
each month before your full retirement age.
As a general rule, early retirement will give you about the same total Social Security benefits over your
lifetime, but in smaller amounts to take into account the longer period you will receive them.
Here's An Important Point: There are disadvantages and advantages to taking your benefit before your
full retirement age. The advantage is that you collect benefits for a longer period of time. The
disadvantage is that your benefit is permanently reduced. Each person's situation is different, so make
sure you contact Social Security before you decide to retire.
 Percentage monthly and total reductions are approximate due to rounding. The
actual reductions are .555 or 5/9 of 1% per month for the first 36 months and .416 or 5/12 of
1% for subsequent months
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