Module 3- Social Security Flashcards
Origin of Social Security
Less than a quarter of employers have pensions now
•90% of individuals over 65 receive Social Security
•Half or more of income for 53% of married and 74% of unmarried
•20% of retirees rely on it for all of their income
-50% of elderly women rely on SS for 90% of income
-57% of retirees expect advisor to help make the social security decision
•Enacted in 1935 as part of FDR’s new deal, designed to earn benefits as one pays employment taxes (was 2% now 15.3%)
•Employee and Employer pay 6.2% a piece (12.4% total) for Old Age Survivors and Disability Insurance (OASDI) applied up to 127,200 in comp, 1.45% (2.9% total) for hospital insurance. Additional 0.9% medicare tax if over $250,000 Joint $200,000 single
•165 Million are covered, max benefit is $2,687 per month, average received was $1,360
•Aggregate income attributable to Social Security has grown compared to asset income
Chapter 1 Questions
- Original intent of social security was to provide an income floor and prevent retirees from going into poverty
• 2. Total FICA tax is 15.3%. Employer and employee pay 6.2% for old age, survivors and disability insurance (OASDI) and 1.45% each
• 3. Social Security wage base is 127,200 in 2017.
• 4. A large chunk of American’s currently rely on social security to provide income with upwards of 50% of Americans relying on the income for over half of their retirement lifestyle.
Chapter 2: Estimating Future Benefits
- Must be a minimum of 62
- 10 years work experience to be fully covered, 4 points per year if earnings are over 5,200 or every 1,300. Must pay SS taxes
- Federal governments employees prior to 1984 were covered under Civil Service Retirement
- Railroad employees have their own retirement system
- Farm workers, family business, business owners only receiving dividend income, children under 18 working for family in an unincorporated business
Fully Insured vs Partially Insured
•Fully insured- 10 years or 40 quarters of employment
-Must be fully insured to receive retirement benefits
•Spousal retirement benefits and for widower age 60 or over, and benefits for a dependent parent are covered
•Disability benefits if fully insured in lifetime and 20 work credits in past 10 years
- Currently insured- 6 quarters of coverage in 13 quarter period
- Child benefits, mother or father benefits and lump sum death benefit available
How to calculate benefit payment
2 factors- earning history and age at beginning of benefits
Taxable base is 127,200 for OASDI tax (6.2/12.4% of amount), all earnings are taxed on 1.45/2.9 medicare and .9% add on over 200k single/250k joint
Adjust earnings before age 60 for inflation
Highest 35 years of earnings, adjusted for inflation after 1950
If only 30 years of work, then enter 0 for other 5 years
Total the inflation adjusted 35 years and divide by 420 (# of months) to get average indexed monthly earnings or AIME
Social security then applies a formula to get the monthly benefit or primary insurance amount (PIA)
PIA is adjusted for inflation annually measured by CPI (announced in OCT)
Will get higher adjustment for Cost Of Living Adjustment (COLA) if starting late
Low income earners receive a higher % of AIME (90% of lower earners, 26% of higher), but higher income earners still receive more
Age 67 is full retirement age (FRA), earliest to begin SS is 62
People retiring before full retirement receive a permanently reduced benefit, but over 50% still do it
Payment is reduced 5/9th of 1% for each month filed before FRA up to 36 months (20%), 5/12th of 1% excess of 3yrs (5%/yr)
Delay past FRA: 8% raise of PIA for each year past full retirement or 2/3rds a month
Past 70, will receive higher COLA, larger surviving spouse benefit, but no Credit for Postponement so no real benefit
Ages to know for SS
Age 50- Disabled survivors can receive benefits
Age 60- When non-disabled survivors can receive benefits
Age 62- Earliest start of benefits
Age 65-67- Full retirement age depending on birth date
Age 70: Delayed retirement age max of 132% of PIA
Chapter 2 Questions
- How to qualify for SS? Over 62, must work for 10 years and acquire 40 work credits ($1,300 per quarter or 5,200 in a year) in a social security covered positions
- Effect of being fully insured versus currently insured?
Fully insured individuals can receive benefits. Benefits for a spouse, widow, dependent parent are also available. Eligible for disability if fully insured and 20 credits in past 10 years.
Currently insured- 6 quarters of coverage in past 13 quarters. Children benefits, mother’s or father’s benefits and lump sum death benefit available
- How SS is calculated? Life time earnings on a 35 year period averaged monthly to find AIME. Social security calculation (% of AIME based on earnings) finds PIA. PIA is average amount received. Age determines % of PIA received. 5/9ths of 1% reduction for first 36 months before FRA, 5/12hs of 1% beyond that. 8% additional PIA if taken after 67 or 2/3rds of a % until 70.
- Benefits in these situations for covered workers or their spouses.
A. Start collecting at FRA: 100% of PIA
B. Before FRA: reduction of PIA based on 5/9ths of 1% in first 36 month early, 5/12ths beyond that
C. After FRA: 8% per year raise in PIA till 70 (delayed retirement credit)
Explain COLA associated with SS. Will raise amount received for inflation each year, announce in October
Chapter 3: When to Begin Retiree Benefits
Social security benefit is age neutral
Age Neutral- All payments will be equal in long run
Should frame question as an insurance decision
Social security is basically an annuity
Must consider- employment status, health, marital status, personal risk tolerance
Some start right away due to: need income, can invest at higher return than 8% bump past FRA
Estimating life expectancy
1/4 65 year olds will live past 90
1/10 past 95
Woman average age- 86.6
Men- 84.3
Does not take into affect current health, life style and family history
Calculating One’s Breakeven Age
If you are giving up 12,000 to delay taking social security by a year you are basically buying an $80/month inflation adjusted annuity
Singles typically breakeven at 78-80
Must consider survivor’s need for the benefit and life expectancy
Earned income test
Starting SS benefits before FRA and have earned income
Investment income, pensions, cap gains, and inheritances are not included
Lose $1 of SS benefit for every $2 earned above earnings cap of $16,920
Reduced to $1 for ever $3 above 44,880 in year FRA is reached
Once reaching FRA no impact
If making 20k 2 years prior to FRA then:
20,000-16920/2= $1,540 reduction
Reduction would be charged in beginning months of year based on how much one intends to work
Any amount lost is recovered with a higher monthly benefit at FRA (SS recalculates, but could run into problem if dying before reaching FRA for spouse)
Earnings test also effects spouses benefit unless the spouse is still working
Taxation of Social Security Benefit
Only taxable if provisional income exceeds a certain level
AGI (excludes SS)
+ Nontaxable interest (muni’s)
+ 1/2 of SS Benefit
=Provisional income
Under 25k = no tax
25-34k for single returner or
32-44 k for joint
$0.50 for every dollar within bracket
85% of every dollar above up to 85% of total social security benefit
Thresholds are not indexed for inflation
If joint provisional is 38k, then would be taxed on $3,000
Amount above provisional income of 44k for a joint tax payer is 85% taxable unless it exceeds 85% of total social security benefit
Tax torpedo
Recipients of SS who have wealth between 250-600k
Qualified plan distribution would be taxed as ordinary income and also added to provisional income
Recommended to delay to avoid extra taxation
Converting an IRA to a Roth should be done before reaching SS age
Social Security Spousal Benefits
Meant for stay at home moms who dont have earning history
Will pay spouse a max of 50% of primary earner’s benefit if:
- current spouse and married for at least a year
- ex spouse married for 10 years
- must be 62 to start claiming and working spouse must claim
Will not receive both own and spouses benefit, and will receive higher regardless
Delayed retirement credits do not apply to spousal beneifts
Married Filling strategies
File and suspend- Used to allow spousal beneift to be collected while primary earners benefit continued to grow
Phased out in May of 2016
Restricted Application- Being phased out but still possible for those over 62 at end of 2015
File a restricted application for spousal benefits at FRA
Allows you to collect spouse’s benefit and switch to your own at 70 when benefit is fully grown
Spouse must be receiving benefits
