MODULE 3 MAKING THE MOST OF SOCIAL SECURITY RETIREMENT BENEFITS

Question 1

ORIGINAL INTENT OF THE SOCIAL SECURITY SYSTEM

Answer 1

SS was created in 1935 w/ intent of protecting families from poverty after a worker’s retirement

established as a social insurance program, where benefits are earned by contributing to the system during the course of employment by means of a payroll tax, or FICA (Federal Insurance Contributions Act)

Question 2

THE TOTAL FICA TAX IS __%.
THE EMPLOYER AND EMPLOYEE EACH PAY ___% FOR OLD-AGE, SURVIVORS AND DISABILITY INSURANCE (OASDI) AND ____% EACH FOR HOSPITAL INSURANCE.

Answer 2

total fica tax = 15.3%
employer and employee each pay 6.2% for OASDI
and 1.45% each for hospital insurance (7.65% TOTAL)

Question 3

THE SS WAGE BASE IS $_____ IN 2020

Answer 3

$137,700

Question 4

FRED MAKES $100K WORKING FOR ABC CORPORATION. HOW MUCH FICA DOES HE PAY AS AN EMPLOYEE

Answer 4

$100K x 0.0765 = $7650

Question 5

SARAH MAKES $150K IN 2020. WHAT IS HER SHARE OF FICA?

Answer 5

$137.7K x 0.0765 = $10,534.05
$150K-137.7K X 0.0145 = $178.35
$10,534.05 + $178.35 = $10,712.40

Question 6

DISCUSS THE IMPORTANT ROLE SS PLAYS IN PLANNING FOR RETIREMENT

Answer 6

• SS represents half or more of total retirement income for 53% of married couples & 74% of unmarried individuals.
• for most retirees, SS is their only income source that protects against INFLATION RISK, MARKET RISK & LONGEVITY RISK
• SS was never designed to replace your full preretirement income
• it is meant to provide a foundation (income floor) & to prevent poverty during one’s retirement years

Question 7

HOW TO QUALIFY FOR SS RETIREMENT BENEFITS

Answer 7

(1) you must be age 62+ and have earned at least 40 SS credits over your working lifetime
(2) if you become disabled before age 62 you can qualify for SS benefits w/ fewer than 40 credits
(3) you can earn up to 4 credits per year to qualify for SS benefits. for 2020, you must earn at least $1410 to earn 1 credit, or $5640 to earn 4 credits

Question 8

“FULLY INSURED” VS. “CURRENTLY INSURED”

Answer 8

“FULLY INSURED” status is determined by:

• having at least one credit for every year since turning 21 w/ a minimum of 6 and a max of 40 credits
• since only 4 credits can be earned a year, essentially only 10 years of employment covered by SS is the most that can be required to make someone fully insured for life
• credits are earned in 2020 for every $1410 of employment earnings
• in the past credits were called “quarters” to reflect that only 4 were earned a year
• generally, all SS benefits are available if a worker is fully insured @ death

“CURRENTLY INSURED”

• an individual must have at least six credits in the 13-credit period preceding the event for which eligibility is sought
• child’s benefits, mother or father’s benefits, and the lump sum death are available if a worker is only currently insured @ death

Question 9

HOW IS A SS BENEFIT CALCULATED

Answer 9

• start w/ your earnings record
• then apply an inflation adjustment to each year of earnings shown, putting all your past earnings in today’s dollars
• determine your “lifetime average earnings” (your highest 35 years of earnings, as adjusted for inflation)
• your highest 35 yrs are then totaled & divided by 240 (the # of months in 35 years) = AIME, average indexed monthly earnings
• SS then applies to a formula to your AIME to determine your monthly benefit, or PIA (primary insurance amount)

Question 10

DESCRIBE SS BENEFITS AVAILABLE TO COVERED WORKERS OR THEIR SPOUSES FOR:

WORKERS WHO START COLLECTING RETIREMENT BENEFITS AT FRA

Answer 10

by starting SS benefits at FRA, you will receive 100% of your PIA

Question 11

DESCRIBE SS BENEFITS AVAILABLE TO COVERED WORKERS OR THEIR SPOUSES FOR:

WORKERS WHO START COLLECTING RETIREMENT BENEFITS BEFORE THEY REACH THEIR FRA

Answer 11

while benefits can begin as early as age 62, if you collect SS before your FRA, you will receive a PERMANENTLY reduced benefit (reduction calculated as follows):

• pmt is reduced 5/9 of 1% for each month filed before FRA, up to 36 months
• pmt is reduced 5/12 of 1% each month filed early in excess of 36 months

Question 12

DESCRIBE SS BENEFITS AVAILABLE TO COVERED WORKERS OR THEIR SPOUSES FOR:

WORKERS WHO START COLLECTING RETIREMENT BENEFITS AFTER THEY REACH THEIR FRA

Answer 12

if you delay receipt of benefits until after your FRA, you will receive a pmt in excess of that which you would have otherwise received.

for those just reaching FRA, this increase equates to an 8% of PIA raise/year for each year you delay filing after your FRA, up until a max of age 70. SS refers to this raise as a delayed retirement credit (DRC)

Question 13

EXPLAIN THE COLA ASSOCIATED W/ SS

Answer 13

once you begin receiving your SS retirement benefit, widow/widower’s benefit, or disability related benefit, you may be given a yearly cost of living increase in the month of December (appearing in your Jan check)

consequently, the check that you receive in the month of January will reflect any applicable cost of living increase for the year

Question 14

HOW MANY CREDITS ARE REQUIRED FOR A 30 YR OLD WORKER TO BE FULLY INSURED?

Answer 14

• needs 1 credit per year since age 21 w/ a minimum of 6 and max of 40
• age 30 minus 22 (age 21 plus one year) = 8, and eight is more than the minimum of 6, so 8 is the least number of credits someone age 30 can have and still be FULLY INSURED.

Question 15

DISCUSS FACTORS ONE SHOULD CONSIDER WHEN DECIDING WHETHER TO FILE FOR THEIR SS BENEFIT

Answer 15

(1) current resources
(2) life expectancy
(3) breakeven age
(4) whether you are still employed (earnings test reduction)

Question 16

BREAKEVEN AGE

Answer 16

breakeven age is the age at which the total value of higher benefits you will receive from delaying benefits starts to exceed the total value of the lower benefits you will receive if you start early

Question 17

WHAT ARE THE EARNED INCOME RESTRICTIONS?

Answer 17

in 2020, if you are under your FRA & working, you will lose $1 in SS benefits for every $2 earned above the earnings cap of $18,240 (indexed for inflation)

in the year you reach your FRA this reduction is reduced to $1 for every $3 earned above the earnings cap of $48,600 for 2020.

once you obtain your FRA, you may continue to work & earn money w/o it impacting your SS benefit

Question 18

PROVISIONAL INCOME

Answer 18

your AGI 
\+ any tax exempt income (muni bonds)
\+ excluded foreign income
\+ 1/2 your SS benefits
-------------------------------------------------------------
= provisional income

Question 19

JOHN IS SINGLE AND HAD AN AGI $60K, AND WAS RECEIVING $30K IN SS BENEFITS. HOW MUCH OF HIS SS BENEFIT WILL BE SUBJECT TO TAXATION?

Answer 19

85% of john’s SS benefit will be subject to taxation

as much as 85% of your SS benefits may be subject to federal income tax depending on the amount of your provisional income.

(1) if you have provisional income of less than $25K ($32K for joint filers), none of your SS benefits will be taxable.
(2) if your provisional income is between $25K and $34K ($32K to $44K if married filing jointly), up to 50% of your benefits may be taxable.
(3) if your provisional income is more than $34K ($44K if MFJ), up to 85% of your SS benefits may be taxable.

you can never be taxed on more than 85% of your SS benefit

Question 20

EXPLAIN WHEN THE WINDFALL ELIMINATION PROVISION MIGHT COME INTO PLAY

Answer 20

the WEP applies when an individual is eligible SS due to their work in a “covered position” but is also receiving a pension from work at a “noncovered position.” due to the WEP any pension they received based on their government work may reduce their SS benefits.

for 2020, the max reduction under the provision is $480 per month, or 1/2 the monthly pension benefit, whichever is less. the amount of reduction will depend on how many years he worked in the covered position and earned “substantial earnings” you have in a covered position. its impact is completely phased out for individuals who have 30+ years of “substantial earnings” in a covered position.

Question 21

EXPLAIN THE GOVERNMENT PENSION OFFSET MIGHT COME INTO PLAY

Answer 21

the GPO will apply in cases where an individual qualifies for a pension based on their own non-SS covered employment and a SS spousal benefit based on a spouse’s work in the SS-covered employment.

the GPO provision will reduce the spousal or survivor benefit by two-thirds of the amount of the pension

Question 22

WHAT ARE THE PROVISIONS FOR RECEIVING AN EX-SPOUSE’S BENEFIT?

Answer 22

you will qualify for benefits based on your ex-spouse’s record when:

• you were married 10+ years
• are currently unmarried, AND
• are age 62 or older

the divorced spouse’s benefit @ FRA = 1/2 the worker’s PIA and will be reduced if taken prior to FRA

such a benefit will end if you remarry, die or become entitled to a retirement/disability benefit that equals or exceeds 1/2 of the worker’s PIA

Question 23

A HUSBAND, WHO IS FULLY INSURED WORKER, RECENTLY DIED. HE & HIS WIFE HAVE NO CHILDREN. IS HIS WIFE ENTITLED TO A SPOUSAL BENEFIT?

Answer 23

survivors can collect benefits based on their dcsd spouse’s work history & earnings once they turn age 60, even if they have no children. if they’re caring for a qualifying child, they can collect benefits before age 60. however, the amt received varies greatly depending on when benefits collection begins.

the amount a wife receives in survivor’s benefits can be the same as the amt the husband would have received in retirement benefits when he reached full retirement age, based on his earnings during the years that he worked.

Question 24

ID REFORMS THAT ARE BEING CONSIDERED OR HAVE BEEN CONSIDERED TO ADDRESS THE SS SHORTFALL

Answer 24

many reforms are now being considered to address the projected 23% SS shortfall. these include:

• cutting benefit pmts
• raising SS payroll taxes
• further increasing FRA
• changing how excess funds are invested
• privatizing SS
• providing direct government subsidies to the program

Question 25

DIVORCED SPOUSE’S BENEFIT

Answer 25

the divorced spouse of an insured worker can qualify for SS retirement benefits based on the workers’ SS record in 3 different categories:

(1) spouse’s benefit
(2) a mother or father’s benefit
(3) a widow(er)’s benefit

a spouse’s benefit is payable if the divorced spouse is at least age 62, the worker is entitled to SS retirement or disability benefit, the divorced spouse has not remarried, and the spouse was married to the worker for at least 10 years before the divorce became final

the widower’s benefits are based upon the worker’s SS record if the surviving spouse was married to the worker for at least 10 years before the divorce became final, the divorced spouse is age 60+, or is at least age 50 but not age 60 and is disabled, the worker died fully insured, and the divorced spouse is not married.

the mother’s or father’s benefit based on the worker’s SS record can be claimed if the worker died fully or currently insured, the divorced spouse is the father or mother of the worker’s child or when both of them adopted a child and the child was then under age 18, the divorced spouse is not married, has in care the worker’s child who is entitled to child’s benefits based on the worker’s earnings record, and the child is under age 16 or disabled.

Question 26

MAX FAMILY BENEFIT

Answer 26

a max amt of SS retirement & disability benefits that can be paid based on one SS account

Question 27

SPOUSE’S BENEFIT

Answer 27

a person is entitled to spouse’s benefits based on a worker’s SS record if the worker is entitled to retirement or disability benefits and the spouse is either age 62+, or is caring for a child under age 16 or disabled, who is entitled to benefits under the worker’s SS record

the spouse of the worker must also meet one of the following conditions:

(1) the spouse must have been married to the worker a minimum of one year before filing an application for benefits
(2) the spouse was entitled, or potentially entitled to spouse’s, widow(er)’s, parent’s, or childhood disability benefits in the month before the month of marriage to the worker, or
(3) the spouse was entitled to or potentially entitled to a widow(er)’s parent’s or child’s (over 18) annuity under the Railroad Retirement Act in the month before the month of marriage to the worker

Question 28

WIDOW(ER)’S BENEFIT

Answer 28

the widower of a fully insured worker is entitled to a widower’s SS benefit based on the dcsd worker’s earnings if

(1) the widower is age 60+ OR is at least age 50 but not age 60 and is disabled
(2) the widower is not married (except under special circumstances)
(3) the widower was married to the dcsd worker - either @ the time of death or in a previous marriage that ended in divorce - for at least 9 months immediately prior to the worker’s death (unless the death was accidental or occurred in the line of duty while a member of a uniformed service serving on active duty)
(4) or the widower and worker had a biological or adopted child together