- 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 Spouse’s Benefits
- Family Benefits for a Deceased Worker
- Parent’s Benefits
- Disability Benefits and Eligibility
- Determining Disability
- Working While Receiving Disability Benefits
- Disabled Widow’s/Widower’s Benefits
- Family Benefits for a Disabled Worker
An Overview of the National Social Security Program
Presently, about 65.7 million people collect some form of Social Security benefit. Fifty-seven and one-half million people receive regular retirement benefits. Security Disability Income known as SSDI is paid to an additional 8.8 million people. Social Security Benefits and Supplemental Social Security Income are paid to an additional 2.7 million people. 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 168 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 2.7 workers for every Social Security beneficiary. By the time the Boomer generation attains full retirement age, this ratio will be 2.1 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 1943 or later. Full retirement age now caps at age 67 for workers born after 1959. Thus, baby boomers will have to wait longer to receive their regular old-age Social Security benefits.
|Year of Birth||Full Retirement Age|
|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 will be deducted from a worker’s pay in 2017 will remain at 6.2 percent of earnings. An estimated 169 million people will pay into the program in 2017. The maximum amount on which this tax is imposed for the year 2017 will be $127,200. The maximum social security tax that can be withheld from a worker in 2017 will be $7,886.40. The maximum amount of earnings on which this social security tax is imposed may increase each year. Employers will also pay an additional 6.2% of their employees’ covered wages in 2017 for their share of social security taxes. Self-employed individuals will pay 12.4% of their income in social security taxes up to the $127,200 wage base.
A Medicare tax is also deducted from a worker’s paycheck. Presently, this is 1.45% of earnings for employees earning less than $200,000. There is an additional Medicare Tax for single workers earning more than $200,000. Married couples filing a joint return who earn more than $250,000 will have to pay this additional Medicare Tax. The rate of the additional Medicare Tax is 0.9% on the wages in excess of $200,000 or $250,000 for a married couple. This statute requires an employer to withhold the additional Medicare Tax on wages or compensation the employer pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax. For example, the employee’s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. Any withheld but unassessed Additional Medicare Tax on the spouse earning in excess of $200,000 will be credited against the total tax liability shown on the individual’s income tax return (Form 1040).The employer is not required to notify an employee when it begins withholding the Additional Medicare Tax. There is no employer match for the Additional Medicare Tax. An example for a single taxpayer with wages of $245,000 is as follows. In 2017, a single individual with wages of $245,000 will owe the Medicare tax rate of 1.45% on the first $200,000 of wages. The Medicare higher rate of 2.35% will be applied to the remaining $45,000 of wages for 2017. Employers will be responsible for collecting and remitting the additional Medicare payroll tax on wages that exceed $200,000. There is no maximum amount of earnings on which this tax is imposed.
A surtax in addition to the federal income tax is imposed on the net investment income of individuals, estates and trusts. This is commonly referred to as the Medicare tax. This surtax for individuals is 3.8% of the lesser of the taxpayer’s modified adjusted gross income in excess of the threshold amount or the taxpayer’s net investment income for that year. The threshold amount is $200,000 for individuals, $250,000 for married couples or $125,000 for married taxpayers filing separately. This threshold amount is not indexed for inflation.
Net investment income includes gross income from interest, dividends, rents, royalties, annuities, gains from the disposition of property, passive activities less allocable expenses. Capital gains are an item of net investment income. However, several types of income are specifically excluded from the definition of investment income. They include distributions from IRAs and qualified plans, non-passive trade or business income, tax-exempt income, tax-exempt annuities and income subject to self-employment tax. Rental income is generally passive and counted toward net investment income. However, there is an exception for real estate professionals that devote 750 hours or more each year to working in the real estate business.
There is also a net investment income tax on estates and trusts equal to 3.8% of the lesser of the estate’s or trust’s adjusted gross income in excess of the highest income tax bracket threshold or the estate’s or trust’s undistributed net investment income. Distributions from an estate or trust reduce the income subject to the 3.8% tax on net investment income. The threshold for estates and trusts is indexed for inflation.
Until the Net Investment Income and other income reach the threshold applicable to the taxpayer, the surtax is not triggered. Once the other income and the net investment income exceed the threshold amount, only the excess over the threshold amount is subject to the surtax.
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 age 66 can earn without a reduction in Social Security benefits in the year 2017 will be $16,920. 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 1951 attains age 66, the maximum amount that can be earned prior to his or her birth month without reduction in Social Security benefits in the year 2017 is $44,880. For every $3 earned over this limit, there is a $1 withheld. 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.
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 2017 is $1,300. A credit is earned by reporting at least $1,300 in 2017 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 $5,200 ($1,300 x 4= $5,200) at any time during a year. This minimum amount of earnings for credit for a quarter of coverage increases each year.
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 retiring early 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 age 67 retires early at age 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 66 years and two months chooses early retirement at age 62 and lives beyond age 77, the worker may 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 due to early retirement. 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 to the deceased spouse who took early retirement.
John, who was 62 in January of 2017, 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 years and two months. 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 62 and age 65 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 and two months or takes early retirement at age 62.
|Retirement at 62
Total Benefit is 75% of Annual Benefit Selected
Retirement at age 66 and two months
Total Benefit is 100% of Annual Benefit Selected
The breakeven point is during the 17th 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 $16,920 per year between ages 62 and 65 without having to repay some of the social security received during the early retirement years.
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 as of 2011. Now, a person taking early retirement cannot pay back the previously withdrawn funds and begin receiving regular retirement benefits.
A worker may find it advantageous to delay normal retirement in two ways. First, the extra income earned after full retirement age usually increases average earnings because the earnings in later years may be higher and will replace a previous lower year of earnings. The higher the earnings, the higher the monthly Social Security benefits. Secondly, a special credit is given to a worker who delays retirement. This credit is a percentage added on to the worker’s Social Security benefit that varies depending on his or her full retirement age.
A delayed retirement credit of 8% per year is given for retirement after the normal retirement age. To receive this credit, a person must be working at his or her normal retirement age. No additional credit is given after age 70.
A person born in 1948 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 1948 which is 8% per year 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.
Until April 30, 2016, a married worker who intended to take advantage of the late-retirement benefit could file for social security benefits at the full retirement age of 66, and then immediately suspend the receipt of his or her social security benefit until age 70 if the spouse’s lifetime earnings are lower. If the spouse with the higher earnings record filed for regular social security benefits at age 66 and then suspended his or her benefit, the spouse with the lower lifetime earnings could receive a higher normal retirement benefit based on the non-retiring spouse’s record. This is because the spousal benefit is 50% of what his or her spouse is to receive at regular retirement. By example, John has reached full retirement age of 66, but intends to not receive Social Security benefits until age 70. His regular retirement monthly benefit is $1,800. By waiting until age 70 to begin receiving benefits, his monthly delayed retirement benefit will be 32% more or $2,376. If his wife, Mary, who is also age 66, has lower life-time earnings that will entitle her to only receive $750 per month from Social Security. She could instead request to receive at age 66 an amount equal to $900 per month, which is 50% of John’s regular retirement benefit. However, John must first file for benefits at age 66 and then immediately suspend the receipt of the benefits. In addition, if John dies first after attaining age 70, Mary’s benefit will increase to $2,376 per month. This is because her retirement benefit is based on the worker’s benefit or his or her spouse’s benefit, whichever is greater. However, a new law went into effect on April 30, 2016, that eliminates this strategy. Under the new law a spouse cannot begin receiving benefits until the worker is actually receiving benefits. Workers can still file and suspend, but spouses (or other dependents, including minor and disabled children) cannot receive benefits during the suspension. The law does not affect workers who have already filed and suspended benefits before the effective date.
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 to 85% of his or her Social Security benefits. A married couple, filing jointly, may be taxed on 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.
Gregory and Julia are age 66, and are married and retired. In the year 2017, 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|
|plus: Pension benefits||60,000|
|plus: one-half of Social Security benefits||15,000|
|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|
|a. One-half of the excess over the first threshold:|
|Plus 35 percent of the excess over||$35,000|
|b. 85 percent of Social Security benefit|
|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. The spouse must be at least age 62 or have a qualifying child in her/his care. A qualifying child, means a child who is under age 16 or who receives Social Security disability benefits. The spousal benefit can be as much as half of the worker’s “primary insurance amount,” depending on the spouse’s age at retirement. If the spouse begins receiving benefits before normal (or full) retirement age, the spouse will receive a reduced benefit. However, if a spouse is caring for a qualifying child, the spousal benefit is not reduced. The spouse must have been married to the worker for at least one year. 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 worker’s 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 deceased 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 or widower 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 survivor’s 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 or widower and the minor children are not entitled to Medicare unless they are disabled. Thus, it maybe necessary to use a portion of this monthly Social Security family benefit for the family’s health insurance premiums.
A parent may be dependent on a worker at the time of the worker’s death. This occurs if the parent is at least 62 years of age, receiving at least one-half of his or her support from the worker at the time of the worker’s 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 $1,300 in 2017) 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.
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 2017, $1,300 in earnings equals one quarter of coverage. Therefore, $5,200 earned equals four quarters of coverage for 2017.
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 worker’s 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 2017, earnings of $1,170 per month or more is considered substantial. If a worker’s earnings average less than $1,170 per month, the worker’s disability benefits should continue. For a blind person, earnings of $1,950 or more will be considered substantial in the year 2017.
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 of 50 and 60. A subsequent marriage after age 50 will not affect the right to receive social security as the disabled widow or widower 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 re-establish the disabled widow’s or widower’s 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
A 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.