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
Why people dont delay
Hard to convince client to trade pile of money for illiquid stream of income
Want to get money while they can from SS
Underestimate of life expectancy
Believing retirement cant start until claiming SS
Chapter 3 Questions
- Factors of determining when to retire:
- Current need for income, Life expectancy, current health, spousal need, earned income amount - Break even age for SS:
- Total value of delayed benefit amount will exceed lower benefit amount - Earned income restrictions
- Above 16,920 in years prior to 1 year before FRA will lose $1 of SS benefit for every $2 earned
- Above 44880 lose $1 of every $3 dollars in SS benefit in year of hitting FRA
- After hitting FRA, no loss in SS benefit - What is provisional income?
AGI + non-taxed interest + SS benefit - Single with AGI of 60k, 30k of SS benefit. How much is taxed?
4,500 + (90-34k)*.85= 52,100
Only 25,500 or 85% of SS benefit
Windfall Elimination Provision and Government Pension Offset Provision
If worked in a Federal, State or other government job not covered by SS then may have limit on SS benefit
WEP- Reduces SS for retirees/disabled workers who receive government pension from a non-SS covered position
WEP impact reduced for each year working in a covered position exceeding 20 years
Phased out upon hitting 30+
If married, survivor gets a social security benefit omitting the WEP reduction
Government Pension Offset (GPO)-
If entitled to a spousal or survivor benefit, it is reduced by 2/3rds of the pension
If collecting $1,200 from a pension and eligible for a $900 spousal benefit, only receive $100 of the spousal benefit
Both provisions can apply
What if your client is divorced?
Married 10+ years, is currently unmarried and both spouses are above age 62
If ex-spouse has not yet filled, must be divorced two years to start receiving benefit
At FRA benefit would equal 1/2 of PIA of working spouse
Would end if remarries
If former spouse is deceased (and they were married for 10 years) can start collecting as early as age 60 and still receive survivor benefits even if remarried
Divorced spousal/survivor benefits do not count towards family maximum
Does a single client have options?
Could file and suspend at FRA in case of terminal illness
Would allow client to take full amount of payments from FRA to 70 in case of illness
What if they filed too early?
Allowed to payback amounts received to unfile if within first 12 months
If past twelve months, could voluntarily suspend payments to earn delayed retirement credits until 70
Survivor Benefits (only death scenarios)
If widowed before spouse began SS: Benefit equal to deceased spouse’s PIA
If widowed after spouse began SS:
- If married 9 months allowed to assume deceased spouse’s benefit
- Can apply at age 60 for a reduced benefit (even if they get remarried)
Legislation did not mention widowers when banning strategies to maximize SS benefit
Family Maximum
Max payable based on one wage earners history
Not applicable if just the worker and their spouse
Divorced spouse or surviving divorced spouse are not included
Family Max is usually 150%-180% of worker’s benefit
Worker’s individual benefit would not be reduced, only those around them
If currently insured spouse passes away
Widower caring for a child under age 16 or disabled is entitled to:
50% of spouse’s IPA at retirement
75% of PIA until condition ceases
Unmarried children under age 18 (19 if in high school) or any age if disabled before 22:
50% of PIA (subject to fam max) at retirement
75% of PIA until condition ceases
Chapter 4 review questions
- Explain when WEP might come into play
- If worked for a non-covered SS position or a government employee
- If did not work in a covered position for more than 30 years
- max reduction is $428 or 1/2 of pension benefit whichever is less - Explain when gov pension offset may come into play
- If employee receives a government pension, it will reduce his social security benefit (if receiving spousal or a survivor benefit) by 2/3rds the pension amount - Provision for receiving an ex-spouse’s benefit:
- Married for 10+ years, both over the age of 62, ex-spouse must be receiving the benefit, unmarried - Yes, entitled to 100% of Husband’s PIA upon retirement at FRA or a reduced retirement amount of that PIA possibly to be taken at age 60
Chapter 5: Future of Social Security
Developed a trust fund in 1983 to build up surpluses
Projected to run at surplus until 2020
No funds left in 2033
Should probably be more concerned about a lower amount of benefits than no SS at all
Ratio of workers paying SS to retirees in 2032 is projected to be 2.1 : 1
Reforms being considered to bridge shortfall: increasing retirement age, changing investment style of excess, raising taxes
Social Security Admin send statements at ages every 5 years starting at 25, and every year starting at 60
Should apply for payments 3 months before wanting to receive payments
