Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 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;

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Social Security Beneficiary Data – Dec Who Receives NumberTotal Amount Avg. Monthly Benefit Retired workers 31 million$31 billion $1,044 Dependents of retired 3 million$1.5 billion Disabled workers 6.8 million$6.1 billion $833 Dependents of disabled 1.8 million$0.5 billion Survivors6.5 million$5.7 billion$895

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Those fully insured can receive –retirement benefits –disability benefits

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Family of those currently insured at death of insured can receive: –child’s benefits –mother’s or father’s benefits –lump sum death payment

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 Benefits: Retirement Must be fully insured be at least age 62 throughout the first month of entitlement have filed application for retirement benefits

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 Normal Retirement Age Is gradually increasing Birth Year NRABirth YearNRA < & 2 mo & 2 mo & 4 mo & 4 mo & 6 mo & 6 mo & 8 mo & 8 mo & 10 mo & 10 mo.>

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 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:

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 Disability Facts Disabled workers and their dependents account for 17% of total Social Security Benefits paid about 91% of workers age 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;

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company20 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company21 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company22 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company23 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company24 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company25 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”

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company26 Benefits: Survivor Benefits Child’s Benefits –must meet relationship requirements of fully or currently insured deceased worker –be 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company27 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)

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company28 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company29 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company30 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)

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company31 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company32 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company33 Maximum Family Benefits Maximum family benefit for those who reach age 62 or die in 2009: (1) 150% of the first $950 of PIA, plus (2) 272% of PIA over $950 through $1,372 plus (3) 134% of PIA over $1,372 through $1,789, plus (4) 175% over $1,789 Maximum is subject to increases based on wage levels

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company34 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company35 Delayed Retirement Credit Workers continuing on the job receive an  in retire- ment 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company36 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company37 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company38 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company39 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company40 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company41 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

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company42 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.

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company43 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.

Social Security Chapter 3 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company44 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.raise payroll tax a small amount (e.g. 1/2%) 2.include newly hired state and local workers in system 3.raise maximum wages subject to Social Security 4.gradually increase age for full benefits to 70 Discuss the pros and cons of each proposal