Social Security in Nine Questions
Presented by
Invesco
Please see slide 19 for important information
TR-SSNINE-PPT-1P 12/14
Invesco Distributors, Inc.
The information contained in this presentation is as
of Nov. 10, 2014 (unless otherwise noted) and is
subject to change without notice. The information
presented is the most current available. There is
no guarantee the outcomes mentioned within this
presentation will be realized.
Agenda
Nine Questions
1
2
3
4
5
6
7
8
9
Is the system in trouble?
2
TR-SSNINE-PPT-1P 12/14
What is my benefit based on?
When can I begin taking benefits?
How much money will I get?
Can I get Social Security and still work?
When should I begin taking benefits?
How does Social Security work for my spouse?
How does Social Security work for my ex-spouse?
What happens if my spouse dies?
Q #1
Is the system in trouble?
1935 Social Security Act signed into law
1939 Benefits extended to workers’ dependents and survivors
1950 First cost of living adjustment (COLA)
1972 Enacts automatic COLA increasing benefits annually
1983 President Reagan signs law strengthening Social Security
2011 Government taps trust fund bond interest to cover costs
≈
2020 Government starts selling trust fund bonds to cover costs
2033 Trust fund depleted
2034 Social Security taxes cover around 75% of benefits
Source: whitehouse.gov
3
TR-SSNINE-PPT-1P 12/14
Q #2
What is my benefit based on?
Retirement benefit eligibility: Earn 40 “quarters
of coverage”
Federal Insurance Contributions Act (FICA)
 Worker and employer each pay 6.2%
(self-employed pay 12.4%)
 Maximum earnings cap for 2014: $117,000
Retirement benefit: Based on two components
 Earnings history: Primary Insurance Amount (PIA)
 Age retirement benefits start: Compared to full
retirement age (FRA)
OFF
ON
RM
M+
7
8
9
4
5
6
1
2
3
0
Source: ssa.gov
4
TR-SSNINE-PPT-1P 12/14
M–
%
Q #3
When can I begin taking benefits?
Determining PIA
1. Take all taxed Social Security earnings.
2. Adjust each year for inflation.
3. From step 2, pick the 35 highest-earning
years.
4. Add those 35 years, divide by 420
(number of months) = average indexed
monthly earnings (AIME).
5. Apply Social Security Association (SSA)
benefit formula; designed to give higher
percentage of earnings to lower wage
earners (based on “bend points”).
SSA Benefit Formula
90% of AIME up to the first bend
point, $8161
+ 32% of AIME up to the second
bend point, $4,9171
+ 15% above second bend point
Total of all three is PIA
1 Source: ssa.gov, 2014
5
TR-SSNINE-PPT-1P 12/14
Full Retirement Age (FRA)
Year of Birth
FRA
1943–1954
66
1955
66 and 2 months
1956
66 and 4 months
Start
payout
at age:
1957
66 and 6 months
62
75%
1958
66 and 8 months
63
80%
1959
66 and 10 months
64
86.70%
65
93.30%
66
100%
67
108%
70
132%
1960 and later 67
Delayed Retirement Credits (DRC)
Source: ssa.gov
6
TR-SSNINE-PPT-1P 12/14
Born 1943–1954
Benefit as a
% of FRA
payout:
Late retirement
 Delaying benefits means an automatic increase or DRC.
 Increase is based on length of time from FRA until
benefits begin or until age 70, whichever comes first.
DRC Example: Born 1943–1954
Start payout at age:
Benefit as a % of FRA payout:
66
100%
FRA
67
108%
68
116%
69
124%
70
132%
No DRC after 70
Source: ssa.gov
7
TR-SSNINE-PPT-1P 12/14
DRC
COLAs
 Purpose: To ensure that the
purchasing power of Social
Security benefits is not eroded
by inflation.
 Based on the percentage
increase of Consumer Price Index
for Urban Wage Earners and
Clerical Workers (CPI-W).
 If there is no increase, there can
be no COLA.
Source: ssa.gov
8
TR-SSNINE-PPT-1P 12/14
COLAs
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
–
–
–
–
–
–
–
–
–
–
–
–
1.4%
2.1%
2.7%
4.1%
3.3%
2.3%
5.8%
0.0%
0.0%
3.6%
1.7%
1.5%
Q #4
How much money will I get?
Things that may affect benefits
 Working while receiving early
retirement benefits
 Taxation of Social Security
benefits
 If you worked in the public
sector during your career
9
TR-SSNINE-PPT-1P 12/14
Q #5
Can I get Social Security and still work?
If you’re working and begin receiving benefits
before FRA, benefits are reduced up until FRA.
(Only individual wages are considered;
spouse’s wages are not.)
Age
2014 Limit
Under FRA
$1 of benefits withheld for every
$2 in earnings above limit
$15,480 a year
Year of FRA
(for the months prior to FRA)
$1 of benefits withheld for every
$3 in earnings above limit
$41,400 a year
FRA and beyond
Unlimited
Source: ssa.gov
This hypothetical example is for illustrative purposes only.
10
TR-SSNINE-PPT-1P 12/14
Example:
Bob, age 65 (FRA 66)
starts collecting
$24,000 in benefits
and earns $40,000.
$40,000
- $15,480
$24,520
÷$2
- $12,260 benefit
reduction
$24,000
- $12,260
$11,740 benefit
Taxation of Social Security benefits
Taxation depends on:
 Worker’s filing status.
 Provisional income.1
Single
Married Filing Jointly
Base amount $25,000
Base amount $32,000
$25,000 – $34,000 =
up to 50% taxable
$32,000 – $44,000 =
up to 50% taxable
$34,000+ = up to 85% taxable
$44,000+ = up to 85% taxable
1 Provisional defined by the Internal Revenue Service (IRS) as the sum of wages, taxable and nontaxable interest, dividends, pensions, selfemployment and other taxable income plus half (50 percent) of your annual Social Security benefits
Source: ssa.gov
11
TR-SSNINE-PPT-1P 12/14
Windfall reduction/government pension offsets
Some workers do not pay into Social Security.
 Pay into other public pension system, i.e. Civil Service Retirement System, in
some states; a teacher, police or firefighter pension system
 If worker’s only job, not eligible for Social Security
Some workers pay into both systems; thus entitled to both.
 Social Security designed to replace higher percentage of low-income workers’
pay and smaller percentage of higher income pay
 SSA calculation provided benefits to worker as if low wage, while worker
collected benefits from another public pension
Windfall Elimination Provision (WEP) designed to correct.
 Calculation formula modified, results in smaller Social Security benefit
Government Pension Offset Rule
 A surviving spouse benefit reduced by two-thirds of pension amount
12
TR-SSNINE-PPT-1P 12/14
Issues
 The break-even question
 Coordinating Social Security benefits
 Ex-spousal benefits
 Survivor benefit
13
TR-SSNINE-PPT-1P 12/14
Q #6
When should I begin taking benefits?
The break-even question
 Example: John’s benefit at age 62 is $1,320/month;
at 66, it is $1,810/month.
– John’s break-even age is 76 years, 6 months. He will receive
the same total amount in benefits either way by that point.
– The probability of John at age 66 reaching the break-even age is 73.8%.1
– Analysis does not include COLAs or taxation of benefits.
 Other considerations (beyond the break-even age):
– Health of John (and spouse) may prevent delaying retirement.
– John may need to continue working to get 35 years of earnings.
– Working during early retirement may be beneficial.
 See ssa.gov retirement estimator for customized projections.
1 Source: ssa.gov, based on “Period Life Table,” 2007
14
TR-SSNINE-PPT-1P 12/14
Q #7
How does Social Security work for my spouse?
Coordinating Social Security benefits
 Spouses have dual entitlements to benefits.
– Larger of 100% of their own or up to 50% of spouse’s PIA
 Primary worker must apply for benefits (but can
suspend).
– File and suspend: Primary worker files for benefits, but
immediately suspends receipt; allows his/her spouse to claim a
spousal benefit, while primary worker lets own benefits grow.
– Cannot be done online. May want to bring Social Security
Legislative Bulletin 106-20 that explains file and suspend.
– “Spousal Benefits only:” Primary worker files and suspends
and spouse files for spousal benefit only. Spouse must be FRA.
– No DRCs on spousal benefits after FRA.
– Spousal benefits are not limited to low-earning spouse.
Source: ssa.gov
15
TR-SSNINE-PPT-1P 12/14
Technically:
When spouse files
for spousal
benefits, SSA
checks to see if
she/he has earned
benefits on own
record. If yes,
pays those first.
If those benefits
are less than
spousal benefits,
SSA adds the
difference to the
monthly payment.
Q #8
How does Social Security work for my ex-spouse?
A divorced spouse can apply for benefits on an ex-spouse’s
work record if:
 He/She had been married to the worker for at least 10 years,
 He/She had been divorced for at least two years,
 And he/she is age 62 or older.
A divorced spouse does not have to wait for ex-spouse to file.
 A divorced spouse collecting benefits does not prevent his/her ex-spouse’s
new spouse from collecting spousal benefits.
 If a divorced spouse remarries, he/she collects benefits from the new
spouse’s work record.
Source: ssa.gov
16
TR-SSNINE-PPT-1P 12/14
Q #9
What happens if my spouse dies?
 Survivor benefit
 Upon death, one time $255 death benefit is paid to: surviving
spouse; if none, to eligible child; if none, not paid.
 Spouse or ex-spouse: 100% of worker’s benefit at FRA
– If taken at age 60 — reduced to 71.5% of FRA benefit
– If spouse remarries before age 60, benefit lost
 Spouses under age 50 with a child under age 16 can receive 75% up
to family maximum.
 Spouse may claim survivor benefit at age 60, then his/her own
benefit at age 62 to 70, without reduction.
Source: ssa.gov
17
TR-SSNINE-PPT-1P 12/14
Have more questions?
 Social Security is a complex
and evolving program with
many moving parts.
 To learn more read:
Introduction To Social
Security.
 If you are contemplating the
best strategy to maximize your
payout, read: Retiring Early:
How Long Should You
Wait?
 Available at ssa.gov.
18
TR-SSNINE-PPT-1P 12/14
Important information
The information contained in this presentation is as of Nov. 10, 2014, (unless
otherwise noted) and is subject to change without notice. The information
presented is the most current available. There is no guarantee the outcomes
mentioned within this presentation will be realized.
All data provided by Invesco unless otherwise noted.
Invesco does not provide tax advice. The tax information contained herein is
general and is not exhaustive by nature. Federal and state tax laws are complex
and constantly changing. You should always consult your own legal or tax
professional for information concerning your individual situation. The opinions in
this piece are not necessarily those of Invesco. Information in this report does not
pertain to any Invesco product and is not a solicitation for any product.
The tax information presented is based on federal income tax law. State and local income
tax laws may differ from federal income tax law.
The information in this presentation does not constitute tax advice. Please contact your tax
advisor for your particular tax situation.
13746
19
TR-SSNINE-PPT-1P 12/14
Invesco Distributors, Inc.
Thank you
TR-SSNINE-PPT-1P 12/14