1. 1 Retirement Planning and Employee Benefits for Financial Planners Chapter 11: Social Security

2. 2 Benefits Available  Retirement Benefits  Disability Benefits  Family Benefits  Survivors’ Benefits  Medicare  Supplemental Social Security

3. 3 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

4. 4 Social Security

5. 5  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  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)

6. 6 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%

7. 7 Social Security Taxes and Contributions  Federal Insurance Contributions Act (FICA) Collected through payroll taxes Total taxes of 7.65%  6.2% up to $117,000 of compensation (OASDI) 4.2% in 2012 6.2% in 2014  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 Fund5.30% up to $117,000 (2014) DI Trust0.9% up to $117,000 (2014) HI Trust1.45% (all compensation) SMI TrustFunded by general tax revenue

8. 8 Qualifying for Social Security Benefits  Fully Insured 40 quarters of coverage  A quarter of coverage = $1,200 for 2014 of earnings  Maximum accrual of 4 quarters per year  Currently Insured 6 quarters of coverage out of the previous 13 quarters

9. 9 Qualifying for Social Security Benefits  Not covered by Social Security Family employees  Child under 18  Not in trade or business Railroad employees Ministers

10. 10 Social Security Beneficiaries  Participant Worker  Participant’s Spouse  Participant’s Children  Dependent Parents  Workers Divorced Spouse (10+ Year Married)

11. 11 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

12. 12 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

13. 13 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 $816 (2014)  32% of the AIME over $816 and less than $4,917 (2014)  15% of the AIME that exceeds $4,917 (2014) 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

14. 14 Calculating the Retirement Benefit (3 of 3)  Worker would receive PIA. Maximum PIA = $2,642 (2014)  Full Retirement Age 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%

15. 15 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%

16. 16 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

17. 17 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 strategies: 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 File and suspend: high and low earnings spouses  Higher income spouse files for benefits at normal retirement age but doesn’t collect benefits  Lower earnings spouse collects spousal benefits immediately

18. 18 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

19. 19 Retirement Earnings Limitations Test (2 of 2)  Before normal retirement age and collecting Social Security: $1 reduction for every $2 of earnings above $15,480 for 2014 if don’t reach full retirement age in 2014 $1 reduction for every $2 of earnings above $41,400 for 2014 if do reach full retirement age in 2014 Don’t take Social Security early if plan to continue to work  After attaining normal retirement age, $0 reduction.

20. 20 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 MFJSingle 1 st Hurdle$32,000$25,000 2 nd Hurdle$44,000$34,000

21. 21 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]

22. 22 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

23. 23 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.

24. 24 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 22 Unmarried Child  Under 18  Under age 19 and in high school  Age 18 or older and disabled before age 22

25. 25 Survivors Benefits  Benefits payable to family members of deceased individuals who were entitled to benefits. Widow or Widower  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

26. 26 Death Benefit  One-time $255 death benefit payment Paid to deceased worker’s surviving spouse, or minor child (if no spouse).

27. 27 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.

28. 28 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

29. 29 Medicare

30. 30 Hospital Insurance – Medicare Part A  Covers Hospital Coverage, and Skilled Nursing Care  Deductible for inpatient hospital care: $1,216 deductible per illness for 2014  for the first 60 days $304 for 2014 per day for days 61-90, and $608 for 2014 per day for days in excess of 90.  Skilled nursing care deductible $152 for 2014 per day for 21 st day to 100 th day.  Coinsurance based on benefit period

31. 31 Medical Insurance – Medicare Part B  Individuals pay monthly premium. Increases based on AGI  $105/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  $147 annual deductible in 2014.

32. 32 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.

33. 33 Supplemental Security Income  Monthly payments to individuals with low income and few assets: 65 and older Disabled Blind  Single: $721 per month for 2014.  Married: $1,082 per month for 2014.

34. 34 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