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SOCIAL SECURITY
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SOCIAL SECURITY UPDATE

Social Security Taxes and Limits on Earnings

The percentage of Social Security tax that will be deducted from a workers pay in 2012 is 4.2 percent of earnings for the first two months of 2012. The percentage of Social Security tax that will be deducted from a worker’s pay in 2012  may return to 6.2% percent of earnings beginning in March, 2012. However, close attention should be kept on this law which may change again in March 2012. The maximum that can be withheld in 2012 will be $6,963.40. The maximum amount on which this tax is imposed for the year 2012 will be $110,100. The percentage of Social Security tax and the maximum amount of earnings on which this tax is imposed may increase each year. Employers will pay the full 6.2% of their employees’ covered wages paid in 2012 for their share of social security taxes. Self-employed individuals will pay 12.4% of their income in social security taxes, up to the $110,100 wage base. A Medicare tax is also deducted from a workers paycheck. Presently, this is an additional 1.45 percent of earnings. There is no maximum amount of earnings on which this tax is imposed.

The Senior Citizens Freedom to Work Act eliminated the Social Security retirement earnings test in and after the month in which a person reaches regular retirement age. However, the Senior Citizens Freedom to Work Act does not repeal the present maximum that can be earned without a reduction in Social Security benefits between ages 62 and 66. The maximum amount that a worker under 66 can earn without a reduction in Social Security benefits in the year 2012 will be $14,640. The maximum that can be earned without a reduction in Social Security benefits may be adjusted by Congress each year. For every $2 earned over the limit, $1 is withheld from Social Security benefits. However, during the calendar year in which a worker born in 1946 attains age 66, the amount that can be earned prior to his or her birth month without a reduction in Social Security benefits in the year 2012 is $38,880. A person can earn an unlimited amount of income without a penalty after attaining age 66. Only wages and net self-employment income count toward the Social Security earnings limit. Income from savings, investments, interest, pensions, annuities, capital gains or insurance will not affect a retired worker’s benefits. Failure to inform the Social Security Administration of any excess earnings by April 15th of the year following the excess earnings may result in the imposition of an additional penalty.

Regular Retirement

A wage earner today may take normal retirement and begin receiving monthly Social Security checks at age 66 if born between 1943 and 1954 (see chart on Page 4). At least 40 quarters of credit for contributing to Social Security (ten years of work) are needed to qualify for Social Security benefits. The amount of earnings upon which Social Security is paid in order to  earn a quarter of coverage from wages or net income in the year 2012 is $1,130. A credit is earned by reporting at least $1,130 in 2012 of wages or net income from self-employment at any time in a year. Thus, a worker can receive credit for four quarters in a year by earning the $4,520 ($1,130 x 4= $4,520) at any time during a year. This minimum amount of earnings for credit for a quarter of coverage increases each year.

Early Retirement

A person may still elect to start receiving Social Security benefits as early as age 62 at a reduced rate. Since the minimum retirement age remains at 62 but the regular retirement age has increased, a person must understand that there will be a reduced monthly benefit. For example, a person who has a full retirement age of 67 and retires at age 62 will have his or her benefit reduced 5/9 of 1 percent for each of the 36 months between age 64 and age 67 plus 5/12 of 1 percent for each month in excess of 36 months before normal retirement age. Thus, if this person whose normal retirement would have been 67 retires early at 62, he or she will only receive 70 percent of his or her full retirement benefit.
The disadvantage to taking early retirement is that it will permanently reduce a worker’s monthly benefit. Thus, if a worker eligible for regular retirement at age 65 chooses early retirement at age 62 and lives beyond age 76, the worker may ultimately receive less in total benefits. If a worker eligible for regular retirement at age 67 chooses early retirement at age 62 and lives beyond age 78, the worker will ultimately receive less in total benefits.

In addition, a surviving spouse may receive less social security benefits for the rest of his or her lifetime. This is because the survivor can receive his or her own benefit or the deceased spouse’s benefit, whichever is more. If the deceased spouse had a larger benefit than the surviving spouse, the surviving spouse will be limited to his or her smaller benefit or the reduced benefit paid the spouse who took early retirement.

Until 2011, persons turning age 62, could take an early Social Security retirement and then invest these funds until age 66. Then, the funds could be paid back to the Social Security Administration and a benefit at the normal retirement amount could be taken. This loophole has been eliminated for 2011. Now, a person taking early retirement cannot payback the previously withdrawn funds and begin receiving regular retirement benefits.

Late Retirement

A worker may find it advantageous in two ways to delay normal retirement. First, the extra income earned after full retirement age usually increases average earnings because the later years earnings may be higher and will replace a previous lower year of earnings. The higher the earnings, the higher the monthly Social Security benefits will be. Secondly, a special credit is given to a worker who delays retirement. This credit is a percentage added on to the workers Social Security benefit that varies depending on his or her full retirement age.

A delayed retirement credit is given for retirement after the normal retirement age. To receive full credit, a person must be working at his or her normal retirement age. No additional credit is given after age 70. The following table shows the delayed retirement credit by year of birth:

Delayed Retirement Credit

Year of Birth       Credit per Year


1937-38

6.5%

 

1939-40

7.0%

 

1941-42

7.5%

 

1943 and later

8.0%

 

A person born in 1946 who intends to retire at age 70 would first determine his or her normal retirement age from the table on page 4. This person’s normal retirement age is 66. The delayed retirement percentage for a person born in 1946 which is 8% would be multiplied by 4 for the additional years to be worked beyond normal retirement. Thus, the worker’s benefit at age 70 would be 32% higher than his or her primary insurance amount at age 66.