Social Security 2014By: Sean McCann

Overview of Social Security Maximization Strategies Future Expectations for Social Security

Topics Discussed

It was passed as the Social Security Act in 1935

Was created under President Franklin D. Roosevelt

Goal was to provide a “comprehensive package of protection against the hazards and vicissitudes of life.”

Social Security History

Social Security is insurance against the event that an individual will be unable to work

Three instances in which this can occur;1. Old Age2. Disability3. Death

What is Social Security?

In 2014; 1. 59 million Americans will receive Social Security

benefits2. $863 billion in benefits will be paid out

165 million workers are covered by Social Security

Nine out of ten individuals age 65 and older receive Social Security benefits

Social Security benefits represent about 38% of the income of the elderly

Facts about Social Security

First Beneficiary of Social Security

First recipient in 1940 Ida May Fuller of

Ludlow VT Total Taxes paid =

$24.75 Total benefits

received= $22,888

Life Expectancy

Qualifications for BenefitsWork a

Minimum of

10 Years

Calculate the highest

35 Years of Earnings

To calculate, divide the national average wage index for the current year by the national average wage index for each year prior to the current year in which the worker had earnings

Then multiply each such ratio by the worker's earnings

Then sum up all of the adjusted earnings and divide by amount of months worked

This adjustment in earnings reflects the change in general wages levels that occurred during the worker’s years of employment

Adjusted Indexed Monthly Earnings (AIME)

Primary Insurance Amount is the monthly benefit an individual would receive at full retirement age

PIA is the sum of three separate percentages of portions of the adjusted indexed monthly earnings

(a) 90 percent of the first bend point of his/her average indexed monthly earnings, plus

(b) 32 percent of his/her average indexed monthly earnings over the first bend point and through the second bend point, plus

(c) 15 percent of his/her average indexed monthly earnings over the second bend point

This formula is designed to replace a higher proportion of income for low income earners than for high income earners

Primary Insurance Amount (PIA)

Case AIME First Second Formula applied to AIME

A $3,694 $816 $4,917 .9(816)+ .32(3694-816)= $1,655.36

B $8,335 $761 $4,586 .9(761)+ .32(4586-761)+ .15(8335-4586)= $2,471.25

Primary Insurance Amount Ex.

•The worker in Case A retires in 2014, and that is the year in which he is first eligible for benefits, his benefits would be $1,655.30•The worker in case B is first eligible in 2010 and thus his PIA is increased by cost-of-living adjustments (COLA) for 2010 through 2013•These COLA’s are 0.0 percent, 3.6 percent, 1.7 percent, 1.5 percent, respectively. The resulting PIA is $2,642.60•COLA is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year

Estimates are in present value Not yet adjusted to Cost of living

Adjustments (COLA) which accounts for inflation

Estimates may differ because;1. Earnings may have increased or decreased2. COLA adjustments3. Estimated benefits are based on current law

Social Security Estimates

Full Retirement Age (FRA)

How does an Individuals Age Affect Benefits?

Contributions Social Securities funding comes from its

beneficiaries-workers- through the Federal Insurance Contributions Act (FICA)

Wages are subject to tax only up to a certain earnings level, called the taxable maximum

Max amount is $117,000 in 2014 Workers pay 6.2% of wages in taxes Employers also pay 6.2% of wages in taxes Total percent of taxes mandated under FICA=

12.4% FICA taxes make up 83% of Social Security revenue

After the amendments of 1983, Social Security began running surpluses, allowing their to be funds on hand when the worker-per-beneficiary ratio declined

These surpluses accumulate over time and are held as bonds in a U.S Treasury account

The interest from these bonds is the second source of revenue for the program

Counts for about 14% of Social Securities revenue

Contributions Cont.

Comes from tax on higher-income beneficiaries If working while receiving benefits there are tax implications1. Income limit is $15,4802. For every $2 earned above that mark, $1in benefits is

withheld3. If you have other income (such as wages, self-

employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to benefits then up to 85% of your benefits may be subject to federal income taxes

4. In the year you reach your FRA, you will lose one dollar for every three dollars earned over $41,400 for the months prior to the month you reach FRA

Money lost through this process in not really lost

Contribution Cont.

If you: file a federal tax return as an "individual" and your

combined income* is◦ between $25,000 and $34,000, you may have to pay income tax on

up to 50 percent of your benefits. ◦ more than $34,000, up to 85 percent of your benefits may be

taxable file a joint return, and you and your spouse have a

combined income* that is◦ between $32,000 and $44,000, you may have to pay income tax on

up to 50 percent of your benefits ◦ more than $44,000, up to 85 percent of your benefits may be

taxable Combined income is: your adjusted gross income +

nontaxable interest+ ½ of your social security benefits

Impact of Taxes

Workers who are not covered by Social Security include civilian federal employees who were hired before 1984; railroad workers (covered under a separate railroad retirement program); certain state and local government employees (covered under state-based retirement plans instead of Social Security); domestic and farm workers who do not meet minimum work requirements; students working for a university or other academic institution; and self-employed persons with very low earnings—generally under $400 per year

People Who are Not Covered by Social Security

Questions to Consider What are your essential retirement goals? What other sources of retirement income do

you have? Are you married? What is your life expectancy? What is the age difference between you and

your spouse? Will your spouse receive his or her own

benefits? Are you eligible to file on an ex-spouses record?

One way you can collect benefits is on your spouse’s record the requirements are;

1. Higher earner has filed2. Spousal benefit has to be higher then your own3. Spouse is full retirement age, if you take them early it

is considered deemed filing4. Maximum spousal benefits are 50%, reduced if take

early

Requirements for Spousal Benefits

There are four requirements that must all apply in order to file for social security on an ex-spouses record;1. Had been married to ex-spouse at least ten years2. Had been divorced to ex-spouse for more then 2 years3. You and your ex-spouse must both be at least 62 years

of age4. Generally cannot be re-married or eligible for equal or

higher benefits Your benefit as a divorced spouse is equal to

50% of your ex-spouses primary insurance amount

Requirements for filing on an ex-spouses record

As a surviving spouse you are entitled to benefits

Benefits can be taken as early as 60, but they will be reduced (28.5%)

Eligible to collect 100% of your higher earning deceased spouses benefits, if survivor is of full retirement age

Collecting Survivor Benefits

Your widow or widower can receive benefits at any age if she or he takes care of your child who is receiving Social Security benefits and younger than age 16 or disabled

Your unmarried children who are younger than age 18 (or up to age 19 if they are attending elementary or secondary school full time) also can receive benefits

Your children can get benefits at any age if they were disabled before age 22 and remain disabled

Your dependent parents can receive benefits if they are age 62 or older

Survivor Benefits Cont.

Pros : 1. Receive payments

early2. Beneficial if you

have low life expectancy

Cons:3. Smallest monthly

check4. Smallest survivor

benefits5. Potential

reduction penalty for employment

Pros:1. Higher monthly

Check2. Higher survivor

benefits3. No penalty for

employment

Cons:4. No interim

benefits

Pros:1. Highest monthly

check2. Highest survivor

benefits3. No penalty for

employment

Cons: 4. Receive benefits

later

Taking Social Security at age 62:

Taking Social Security full retirement age (66):

Taking Social Security at age 70:

Life Expectancy

Break Even Points•62 (early) vs. 66 (FRA): Break-even age is between 77 and 78•62 (early) vs. 70 (late): Break-even age is between 80 and 81•66 (FRA) vs. 70 (late): Break-even age is between 83 and 84

For single women with average life expectancy beneficial to claim Social Security as late as possible up until age 70

For single male with average life expectancy beneficial to claim Social Security at age 68

Claiming Social Security When You are Single

Higher Earner: Collects individual benefits from full retirement age (66) onward

Lower earner: Starting at full retirement age(66) collect spousal benefits until age 70

At age 70, the lower earner switches to his or her own benefits if they are larger then the spousal benefits

Strategy: Collect Spousal Benefits then Collect Your

Own Benefits

Spousal Benefit Example1.This strategy results

in a 32% increase in monthly benefits

2.Also results in a 15% increase in her lifetime benefits

Higher earner: Files for social security at full retirement age then immediately suspends benefits for a later date

Lower earner: Files for spousal benefits at full retirement age

Higher Earner: At age 70 the higher earned spouse claims their own benefits with 132% increased monthly benefits

This strategy is best utilized when there is a large gap in couples income

File and Suspend, Collect Spousal Benefits then Your Own Benefits

This chart below shows the benefits of the file and suspend strategy

Suspending benefits allows for an increase in benefits by 8% each year until you reach age 70, while the other spouse is able to receive spousal benefits

File and Suspend Example

Age 66 Age 70

$2,257

$3,042

$1,129 $1,129

Primary's Benefit Spousal Benefit

Higher Earner: Files for Social Security at full retirement age then immediately suspends benefits for a later date

Lower Earner: Files for Spousal Benefits at full retirement age

Both Spouses: Claim own benefits at age 70 with 132% increased monthly benefits

Best strategy for two high-earners

File and Suspend, Claim Twice

2010 was the first year that disbursements exceeded income, excluding interest on trust-fund assets

2021 will be the first year that disbursements are projected to exceed income, including interest on trust-fund assets

In about 2037 the trust-fund assets are projected to be exhausted

65-plus demographic is growing quickly; 13.7% of population in 2012, 16.8% of population in 2020, 20.3% of population in 2030

Facts about the future of Social Security

Benefits are expected to be fully payable until 2037, when the trust fund reserves will become exhausted

Continuing taxes will be able to pay 76% of scheduled benefits

Congress must make changes to scheduled benefits and revenue sources for the program

Congress Predicts that an immediate reduction in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4% to 14.4% or some combination would be sufficient to allow full payment of the scheduled benefits for the next 75 years

Congress could also increase the Full Retirement Age

Future expectations for Social Security