Social Security - Gay & Ehrhardt P.A. - Planning for a Lifetime

SOCIAL SECURITY
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An Overview of the National Social Security Program
Social Security Taxes and Limits on Earnings
Regular Retirement
Early Retirement
Late Retirement
Taxation of Social Security Benefits
Benefits for a Married Spouse of a Retired Worker
Benefits for a Divorced Spouse of a Retired Worker
Surviving Spouses Benefits
Family Benefits for a Deceased Worker
Parent’s Benefits
Disability Benefits and Eligibility
Determining Disability
Working While Receiving Disability Benefits
Disabled Widows/Widowers Benefits
Family Benefits for a Disabled Worker

An Overview of the National Social Security Program

Presently, about 55 million people collect some form of Social Security benefit. Social Security originated as a retirement program. However, today’s Social Security system provides much more. Persons other than retirees receiving benefits are the disabled, spouses and dependents of persons who receive Social Security, widows, widowers and children of deceased workers. Thus, depending on the circumstances, a person may be eligible for Social Security at any age.

The contributions from the Social Security tax presently paid by in excess of 164 million employees are sufficient at this time to pay the benefits received by the retired and disabled workers and still create a reserve. However, several years ago Congress recognized that the pay-as-you-go Social Security system will be insufficient in future years to fund the increased demand for benefits brought about by the increasing number of retired workers.

In 1950, the ratio of workers to beneficiaries was 16 to 1. Presently, there are 3.3 workers for every Social Security beneficiary. By the time the boomer generation attains full retirement age, this ratio will be 2.2 workers for every 1 beneficiary. By 2030, the baby boomer generation will double the number of retirees receiving Social Security benefits. In recognition of these demographic changes, Congress passed legislation a few years ago intended to respond to this increasing demand for retirement benefits.
The legislation increases Full retirement age for workers born in 1938 or later. Full retirement age now caps at age 67. Thus, present baby boomers will have to wait longer to receive their regular old-age Social Security benefits.

Year of Birth	Full Retirement Age
1943-1954	66
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 and later	67

Social Security Taxes and Limits on Earnings

The percentage of Social Security tax that is deducted from a workers pay is 6.2 percent of earnings. The maximum amount on which this tax is imposed for the year 2010 remains at $106,800. This is the same maximum amount of earnings as the year 2009. The percentage of Social Security tax and the maximum amount of earnings on which this tax is imposed may increase each year, but did not increase for 2010 because there was no increase in the cost of living. 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 2010 remains at $14,600. 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 1944 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 2010 is $37,680. Thereafter, there is a $1 reduction in Social Security benefits for every $3 earned in excess of $37,680 before 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. A person can earn an unlimited amount of income without a penalty after attaining age 66.

With consumer prices down over the past year, monthly Social Security and Supplemental Security Income benefits for more than 57 million Americans will not automatically increase in 2010. This will be the first year without an automatic Cost-of-Living Adjustment (COLA) since they went into effect in 1975.

Regular Retirement

A wage earner today may take normal retirement and begin receiving monthly Social Security checks at age 66 if born in 1944 (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 2010 is $1,120. A credit is earned by reporting at least $1,120 in 2010 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 $4,480 ($1,120 x 4 = $4,480) 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 worker who took early retirement.

LIFE SITUATION #1
John, who was 62 in January of 2010, is considering early retirement. John would receive $1,000 per month at normal retirement. John wants to know how much he would lose in Social Security benefits over his lifetime if he retires at age 62 rather than the normal retirement age of 66. John is in good health and both of his parents lived until age 85. John will only receive 75 percent of his normal retirement benefit if he retires at age 62. This is because his benefit will be reduced 5/9 of 1 percent for each of the 36 months between age 63 and age 66 plus 5/12 of 1 percent for each month in excess of 36 months before normal retirement age. The following chart shows the total Social Security benefits John will receive at various points following retirement, depending on whether John retires at the normal retirement age of 66 or takes early retirement at age 62.

Year	Last month of age	Retirement at 62 Total Benefit is 75% of Monthly Benefit Selected	Retirement at age 66 Total Benefit is 100% of Monthly Benefit Selected
2009	62	$ 9,000
2013	66	$ 45,000	$ 12,000
2017	70	$ 81,000	$ 60,000
2021	74	$117,000	$108,000
2025	78	$153,000	$156,000
2029	82	$189,000	$204,000
2033	86	$225,000	$252,000
2037	90	$261,000	$300,000

The break even point is during the 16th year after early retirement at age 62. At this point, the total benefit for the person who selected normal retirement exceeds the total benefit for the person who selected early retirement. Since it is assumed for the purpose of this illustration that the monthly benefit will be used for living expenses, no projections have been made to determine how much the early retirement benefits might earn if they were invested for the entire period. In addition, the person who elects early retirement must not earn more than $14,160 per year between ages 62 and 65 without having to repay some of the social security received during early the retirement years.

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 69. 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 1944 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 1944 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.

Taxation of Social Security Benefits

Presently, up to 85 percent of Social Security benefits may be included in taxable income if a taxpayer’s income exceeds a certain amount. If an individual’s gross income (including social security, taxable and tax exempt income) exceeds $25,000, he or she may be taxed on up 85% of his or her Social Security benefits. A married couple, filing jointly, may be taxed up to 85% of their Social Security benefit if their total gross income exceeds $32,000. There is no higher exclusion amount for a married person filing separately. Instead, the threshold will be $25,000. The calculation of the income tax on Social Security Benefits is explained in the following chart.

LIFE SITUATION #2
Gregory and Julia are age 66 are married and retired. In the year 2010, they will receive $27,000 in investment earnings; $60,000 from Gregory and Julia’s combined pension plan retirement benefits and $30,000 in combined Social Security retirement benefits. The amount of their Social Security that is subject to federal income tax is computed as follows:

1. Determine the taxpayer’s modified adjusted gross income:

Investment earnings	$27,000
plus: Pension benefits	60,000
plus: one-half of Social Security benefits	15,000
	102,000

2. Determine the modified adjusted gross income over the first threshold:

102,000

($25,000 for singles; $32,000 for husband and wife filing jointly)	(32,000)
	70,000

3. Determine the modified Adjusted Gross Income over the second threshold:

Modified Adjusted Gross Income	$102,000
($34,000 for singles; $44,000 for joint filers)	(44,000)
	58,000

4. Determine the lesser of:

a. One-half of the excess over the first threshold:	$35,000
Plus 35 percent of the excess over second threshold	20,300
	55,300

b. 85 percent of Social Security benefit	25,500
c. 50 percent of total Social Security benefit	15,000
plus 85 percent of excess over second threshold	49,300
	64,300

Since the smallest of these three figures is $25,500, this is the amount of Social Security benefits that will be subject to income taxation.

Benefits for a Married Spouse of a Retired Worker

A spouse may receive up to a maximum of one-half of a retired or disabled worker’s primary insurance amount subject to the family maximum. At age 62, the spouse’s benefit would be 38.35 percent of the primary insurance amount. The spouse must have been married to the worker for at least one year and be at least 62 years of age. The spouse cannot be entitled to a higher old-age or disability benefit from his or her own record. Medicare benefits begin for a spouse at age 65.

Benefits for a Divorced Spouse of a Retired Worker

A divorced spouse is entitled to a monthly benefit equal to one-half of an insured’s unreduced retirement amount. The divorced spouse must be at least 62 years of age, have been married to the worker for at least ten years and the couple must have been divorced for at least two years. This two-year wait is intended to discourage couples from divorcing in order for one member to receive benefits while the other continues to work. In addition, the divorced spouse cannot be remarried and cannot be entitled to a larger benefit on his or her account. An eligible divorced spouse will receive a further reduction if he or she retires before his or her full retirement age. The difference between the current spouse and a divorced spouse is that the current spouse cannot receive benefits on the workers record until the worker actually files for Social Security benefits, whereas the divorced spouse may file for benefits once he or she meets the eligibility requirements and the worker is of retirement age (at least age 62). Medicare benefits begin for a divorced spouse at age 65.

Surviving Spouse’s Benefits

A surviving spouse of a worker who remains unmarried and has no dependent children under age 18 may retire and begin receiving a widow(er)s benefits at 60, or 50 if disabled. The surviving spouse must have been married to the deceased wage earner for at least nine months. If the marriage was less than nine months, it must be proven that the deceased was reasonably expected to have lived nine months and that the insured’s death was not expected. Medicare benefits begin for a widowed spouse at age 65. A subsequent marriage after age 60 will not affect the right to receive social security as the widow of a deceased spouse. If a widow or widower remarries before age 60, there is no right to social security due to the death of the previous spouse. However, entitlement may again be considered if the current marriage ends in divorce or the current spouse dies.

The surviving spouse will also receive a lump sum death benefit of $255. This is a small stipend in relation to the actual cost of burial, which Florida’s legislature has recognized as being on the average of $6,000.

Family Benefits for a Deceased Worker

If a spouse dies fully insured, the surviving spouse and the minor children are entitled to survivors benefits. The surviving mother or father will receive Social Security benefits as a parent of a minor child until that child reaches the age of 16, or is over 16 and disabled and in the care of this parent. A child of the deceased worker will receive Social Security benefits until 18 as long as he or she remains unmarried. A child’s benefits can continue to age 19 if he or she is attending a full-time secondary school. A child cannot be married and continue to receive benefits unless he or she is an adult disabled child who marries another dependent or survivor beneficiary. These family benefits are subject to a family maximum. This means that although the surviving spouse and the minor children of a deceased worker may all be entitled to social security, there is a limit on how much a family may receive. The family maximum is never large enough to pay full benefits to more than two persons. The surviving mother or father and each child receive a proportionate share of this benefit. For example, if the family maximum due to the death of the father is $1,500 per month, then the mother and the three minor children would receive $375 each per month. It is also important to remember that the widow(er) and the minor children are not entitled to Medicare unless they are disabled. Thus, it may be necessary to use a portion of this monthly Social Security family benefit for the family’s health insurance premiums.

Parent’s Benefits

A parent may be dependent on a worker at the time of the workers death. This occurs if the parent is at least 62 years of age, receiving at least one-half his or her support from the worker at the time of the workers death, and is not entitled to his or her own Social Security benefit that exceeds the benefit to be received as a parent. The parent cannot be married when he or she applies for the benefit. However, the parent can subsequently marry another survivor or dependent after the benefit begins to be paid.

Disability Benefits and Eligibility

In order to receive Social Security Disability Insurance (SSDI), a worker must be under age 65 and have obtained a status of disability insured or specially insured.

A worker meets the definition of disability-insured if he or she has enough credits of coverage during a certain period of time before becoming disabled. A credit is earned when a worker receives at least a minimum amount of earnings (presently $1,120 in 2010) during a quarter of a calendar year. However, a worker can earn 4 credits for a year by earning the minimum amount for the year at any time during the year. The worker must have credits for at least 20 quarters during the past 40-quarter period that ends with the quarter in which the disability occurred. This is referred to as the 20/40 rule. A person who is disabled due to blindness is not required to meet this 20/40 rule.

LIFE SITUATION #3:
A married mother with children 5 and 7 years old becomes disabled. She had worked the first five years of marriage and then stayed home the next seven years to raise the children. To receive any kind of benefit from the Social Security Administration a wage earner must have worked at least five of the last ten years. In this case, the mother is not entitled to Social Security disability benefits. Had she worked part-time and earned enough to gain four quarters of coverage each year, she would be eligible. Example: for the year 2010, $1,120 in earnings equals one quarter of coverage. Therefore, $4,380 earned equals four quarters of coverage for 2010.

The exception to this disability-insured status rule relates to younger workers. For instance, a younger worker who has not worked long enough to meet the disability insured status may still be specially insured and entitled to disability benefits if he or she becomes disabled after 21 and before 31 and has credit for one-half the quarters from the time he or she attained age 21 until becoming disabled, with a minimum of 6 credits. If a worker becomes disabled before age 24, the worker is specially insured for disability benefits if he or she has 6 quarters of credit in the 12 quarter period immediately prior to becoming disabled.

Determining Disability

The Social Security Administration will only determine an eligible worker to be disabled when he or she lacks the ability to do any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted (or can be expected to last) for a continuous period of not less than twelve months. The impairment must be so severe that the worker must be unable to do his or her previous work or any other substantial gainful activity which exists in the national economy. The Social Security Disability Insurance monthly payment is based on the workers past earnings. There is usually a five-month waiting period before these payments begin.

Working While Receiving Disability Benefits

Substantial gainful activity (SGA) is the ability to perform work that produces earnings. Beginning in 2010, earnings of $1,000 per month or more is considered substantial. If a workers earnings average less than $1,000 per month, the workers disability benefits should continue. For a blind person, earnings of $1,640 or more will be considered substantial in the year 2010.

Disabled Widow’s/Widower’s Benefits

A disabled widow or widower of a deceased worker is entitled to receive Social Security if he or she is between the ages 50 and 60. A subsequent marriage after age 50 will not affect the right to receive social security as the disabled widow of a deceased spouse. Should the disabled widow or widower who remarried before age 50 divorce the new spouse or should the new spouse die, the death or divorce would reestablish the disabled widows or widowers eligibility to benefits. If a disabled spouse is eligible for multiple benefits as a widow or widower of several spouses, he or she has the option of taking the highest monthly benefit.

Family Benefits for a Disabled Worker

spouse and each dependent child of a disabled worker will also be eligible for a monthly Social Security benefit. When combined, these family benefits cannot exceed 150 percent of the disabled worker’s retirement benefit.