Social Security Presentation

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Social Security Presentation

  1. 1. WHAT EVERYONE SHOULD KNOW ABOUTSOCIAL SECURITY BENEFITS & THE SOCIAL SECURITY SYSTEM ALVAREZ & MARSAL TAXAND, LLC February 2012
  2. 2. THIS PRESENTATION WAS CONDUCTED BY:Alvarez & Marsal Taxand, LLC2100 Ross Avenue, 21st FloorDallas, TX 75201Mark SpittellSenior Director214-438-1017mspittell@alvarezandmarsal.comDouglas FriesenDirector214-438-8435dfriesen@alvarezandmarsal.com
  3. 3. NOTICE ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (I) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (II) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.© Copyright 2011 Alvarez & Marsal Holdings, LLC. All rights reserved. ALVAREZ & MARSAL®, ® and A&M® are trademarks of Alvarez & Marsal Holdings, LLC.
  4. 4. 3WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THESOCIAL SECURITY SYSTEMHOW BIG? By dollars paid, the U.S. Social Security program is the largest government program in the world and the single greatest expenditure in the federal budget In 2010, total income was $781.1 billion and expenditures were $712.5 billion Social Security is currently estimated to keep roughly 40 percent of all Americans age 65 or older out of poverty 90% of people 65 and older get Social Security Nearly 2 in 3 (64%) get half or more of their income from Social Security About 1 in 3 get almost all (90% or more) of their income from Social Security
  5. 5. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 4SOCIAL SECURITY SYSTEMIS SOCIAL SECURITY LEGAL? Two Supreme Court rulings affirmed the constitutionality of the Social Security Act Steward Machine Company v. Davis, 3601 U.S., 548 (1937) – 5-4 decision, that given the exigencies of the Great Depression, “(it) is too late today for the argument to be heard with tolerance that in a crisis so extreme the use of the moneys of the nations to relieve the unemployed and their dependents is a use for any purpose narrower than the promotion of the general welfare”. – The arguments opposed to the Social Security Act (articulated by justices Butler, McReynolds, and Sutherland in their opinions) were: » The Social Security act went beyond the powers that were granted to the federal government in the Constitution » They argued that, by imposing a tax on employers that could be avoided only by contributing to a state unemployment compensation fund, the federal government was essentially forcing each state to establish an unemployment-compensation fund that would meet its criteria, and that the federal government had no power to enact such a program
  6. 6. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 5SOCIAL SECURITY SYSTEMIS SOCIAL SECURITY LEGAL? Helving v. Davis, 301 U.S. 619 (1937) – Decided on the same day as Steward – Upheld the program because “The proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal revenue taxes generally, and are not earmarked in any way.” » That is, the Social Security Tax was constitutional as a mere exercise of Congress‟s general taxation powers
  7. 7. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 6SOCIAL SECURITY SYSTEMHOW MANY PEOPLE RECEIVE SOCIAL SECURITY? 54.2 million people receive Social Security each month in one of these categories:– Retirement Insurance– Disability Insurance– Survivor Insurance 1 in 6 Americans gets Social Security benefits About 1 in 4 households receive income from Social Security
  8. 8. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 7SOCIAL SECURITY SYSTEMHOW MANY PEOPLE RECEIVE SOCIAL SECURITY? First reported Social Security payment – Ernest Ackerman » Retired only one day after Social Security began. Five cents were withheld from his pay during that period, and he received a lump-sum payout of seventeen cents from Social Security.
  9. 9. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 8SOCIAL SECURITY SYSTEMHOW MANY PEOPLE RECEIVE SOCIAL SECURITY? First monthly payment was issued on January 31, 1940 to Ida May Fuller of Ludlow, Vermont – In 1937, 1938 and 1939 she paid a total of $24.75 into the Social Security System – Her first check was for $22.54 – After her second check, Fuller already had received more than she contributed over the three year period. – She lived to be 100 and collected a total of $22,888.92 - like hitting the lotto!
  10. 10. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 9SOCIAL SECURITY SYSTEMHOW MANY PEOPLE RECEIVE SOCIAL SECURITY? 8.2 million disabled workers – Disability insurance pays monthly benefits to 8.2 million workers who are no longer able to work due to illness or impairment – It is part of the Social Security program – Benefits are based on the disabled worker‟s past earnings – To be eligible, a disabled worker must have worked in jobs covered by Social Security
  11. 11. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 10SOCIAL SECURITY SYSTEMHOW MANY PEOPLE RECEIVE SOCIAL SECURITY? 8.2 million disabled workers 4.4 million widows and widowers 2.5 million spouses 1 million adults disables since childhood 3.2 million children
  12. 12. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 11 SOCIAL SECURITY SYSTEM HOW MUCH DOES SOCIAL SECURITY PAY? Average Monthly Type of Benefit Average Yearly Beneficiary Jan. 2011 Benefit All retired workers $1,177 $14,120 All aged widow(er)s, non-disabled $1,135 $13,260 All disabled workers $1,068 $12,816Disabled worker, young spouse and one or more children $1,807 $21,680 Widowed mother and two children $2,390 $28,680 Retired Worker and aged spouse $1,911 $22,930
  13. 13. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 12 SOCIAL SECURITY SYSTEM HOW MUCH DOES SOCIAL SECURITY PAY? Replacement Rates for Retired Worker Age 65, 2010 Benefits$120,000 Past wages $106,800$100,000$80,000 $65,700$60,000 28% $41,100$40,000 34% $26,300 41%$20,000 $22,200 $16,800 55% $18,500 $10,200 $0 Maximum Benefit High medium low
  14. 14. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 13SOCIAL SECURITY SYSTEMHOW MUCH DOES SOCIAL SECURITY PAY? The more you make, the less you get back – Prior chart shows Social Security “tilt” in favor of lower income workers. – Lower Income Workers have fewer resources to save for retirement (so the theory goes), so SS provides a bigger benefit. – It‟s all about the “bend points”.
  15. 15. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 14 SOCIAL SECURITY SYSTEMWHO PAYS FOR SOCIAL SECURITY? Workers and their employers pay with Social Security contributions under the Federal Insurance Contributions Act (FICA)
  16. 16. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 15SOCIAL SECURITY SYSTEMHOW MUCH DO WORKERS PAY? Workers Pay: – 6.2% of their earnings for Social Security (or 4.2% for 2011 and first two months of 2012 under the temporary payroll tax holiday), and – 1.45% of their earnings for Hospital Insurance (HI) under Medicare (Part A) Employers pay an equal amount (6.2% &1.45%) The total is 12.4% for Social Security and 2.9% for Hospital Insurance (HI). (Self employed individuals pay the entire amount.) The Social Security contribution wage base is $110,100 in 2012.
  17. 17. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 16SOCIAL SECURITY SYSTEMIS FICA SOCIAL SECURITY? No Federal Insurance Contributions Act That‟s the TAX Contributions scheme that shows on your paystub. Added to the Internal Revenue Code in 1939.
  18. 18. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 17SOCIAL SECURITY SYSTEMIS FICA SOCIAL SECURITY? Social Security is OASDI (or OASDHI)– OA is for Old Age (Social Security Act passed 1935) » Part of President Roosevelt‟s New Deal Program » First benefits paid in 1937 S is for Survivors (added in 1939) D is for Disability (added in 1956) H is for Health (known as Medicare – added in 1965)– Part of President Lyndon Johnson‟s Great Society Program I is for Insurance– Really? » Paying FICA taxes creates no legal right to benefits » Right to benefits is statutory, and Congress can change it any time they want
  19. 19. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 18SOCIAL SECURITY SYSTEMIS FICA SOCIAL SECURITY? In 1972, cost of living adjustments (COLAs) were added (effective in 1975) – These amendments also established the supplemental Social Security Income (SSI). » SSI is not a Social Security benefit, but is a welfare program • The elderly and disabled poor are entitled to SSI regardless of work history In 1977 Congress increased withholding from 2% to 6.15%. – President Carter said: » “Now this legislation will guarantee that from 1980 to the year 2030, the Social Security funds will be sound.” » Not so much. • The financial picture declined almost immediately and by the early 1980‟s, the system was again in crisis.
  20. 20. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 19SOCIAL SECURITY SYSTEMIS FICA SOCIAL SECURITY?Under the 1983 amendments to Social Security– A previously enacted increase in the payroll tax rate was accelerated– Additional employees were added to the system– The full-benefit retirement age was slowly increased » From 65 to 67 » Up to one-half of the value of the Social Security benefit was made potentially taxable income
  21. 21. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 20SOCIAL SECURITY SYSTEMAM I COVERED?Dates of coverage for workers– 1935 - All workers in commerce and industry (except railroads) under age 65– 1939 - Age restriction eliminated, seamen, bank employees added; additional domestic workers and food-processing workers removed– 1946 - Railroad and Social Security earnings combined to determine eligibility for and amount of survivor benefits– 1950 - Regularly employed farm and domestic workers. Nonfarm self-employed (except professional groups). Federal civilian employees not under retirements system. Non profit organizations could elect coverage for their employees (other than ministers).– 1951 - Railroad workers with less than 10 years of service, for all benefits. (After October 1951, coverage is retroactive to 1937.)
  22. 22. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 21SOCIAL SECURITY SYSTEMAM I COVERED?– 1954 - Farm self-employed. Professional self-employed except lawyers, dentist, doctors and other medical groups. Additional regularly employed farm and domestic workers. Homeworkers. State and Local government employees (except firefighters and police) under retirement system if agreed to by referendum. Ministers could elect coverage as self-employed.– 1956 - Members of the uniformed services. Remainder of professional self-employed except doctors. By referendum, firemen and policemen in designated States.– 1972 - Members of a religious order subject to a vow of poverty.– 1983 - All federal civilian employees hired after 1983; members of Congress, the President and Vice President and federal judges; all employees of nonprofit organizations. Covered state and local government employees prohibited from opting out of social security.– 1990 - Employees of state and local governments not covered under a retirement plan.
  23. 23. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 22SOCIAL SECURITY SYSTEMAM I COVERED?Basically, if you work (in a SS covered employment) for 10 years, you are fullyinsured and entitled to benefits.– Quarters of coverage: » One quarter credited for each $1,120 earned (2011) • Prior to 1978, one quarter for each $50 • Has increased each year since 1978 » Max of four quarters per year » Need 40 quarters of coverage for fully insured status
  24. 24. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 23SOCIAL SECURITY SYSTEMAM I COVERED? To be currently insured – You must have at least 6 quarters of coverage – They must be in the last 13 calendar quarters ending with the quarter in which you: » Die » Become entitled to retirement or disability benefits – Currently insured status is particularly important to your workers who have not yet been in the work force for many years
  25. 25. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 24SOCIAL SECURITY SYSTEMAM I COVERED?Dependent Benefits available for currently insured status;– Lump Sum Death Benefit » Don‟t get excited: it‟s a whopping $255– Monthly payments to surviving spouse during the time your children are under 16 years of age– Monthly payments to your children during the time they are under 18 years of age (or 19 if full time student – pre college)
  26. 26. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 25SOCIAL SECURITY SYSTEMAM I COVERED? Dependent Benefits available for Fully Insured status: – All of the above, plus – Monthly payments to surviving spouse at Normal Retirement Age (NRA) » Or age 60 if reduced benefits are elected » Or age 50 if disabled – Monthly payments to your dependent father or mother at age 62.
  27. 27. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 26SOCIAL SECURITY SYSTEM AM I COVERED?Disability Benefits– Any age under Normal Retirement Age– If after age 30, you must be: » Fully insured » Must have worked in covered employment for 5 out of the last 10 years– If before age 31, you must have » Quarters of coverage in at least ½ the quarters between age 21 and disability • But not less than 6– Disability must be expected to result in death or last at least 12 months.– Disability benefit is your primary insurance amount at time of disability. » These computations average less years of earnings when the worker dies or is disabled before age 62 and use different base years for the inflation adjustments. » Family members are entitled to benefits under the same rules that would apply if you retired
  28. 28. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 27SOCIAL SECURITY SYSTEMBASICS OF THE CALCULATIONThere are two basic steps to determining your monthly benefits.– The first step is computing your average indexed monthly earnings, or AIME.– The second step, which incorporates the AIME, is to determine your primary insurance amount, or PIA. » The PIA is the basic value on which all of the various benefits under Social Security are determined. » There are maximum family benefits determined by the PIA • Usually 150-180 percent of your own benefit payment. If the total benefits due to your spouse and children are more than this limit, their benefits will be reduced. Your benefit will not be affected.
  29. 29. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 28SOCIAL SECURITY SYSTEMAVERAGE INDEXED MONTHLY EARNINGSOut of your entire yearly earnings from age 22 to 62 (40 Years), your highest 35 yearsof earnings are used in the computation of your SS benefit (throw our the lowest five).Your actual earnings are indexed to reflect the change in wage levels during yourworking years.– This provides that benefits will reflect the rise in the standard of living that occurred during your working lifetime.
  30. 30. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 29SOCIAL SECURITY SYSTEMAVERAGE INDEXED MONTHLY EARNINGS The calculation of AIME depends on the year in which you are first eligible to receive retirements benefits, which is age 62. – If you reach age 62 in 2011, then that is your year of eligibility. » Earnings are indexed to the average wage index two years before your year of eligibility, or when you reach age 60. So if you reach age 62 in 2011, then earnings from your prior working years would be indexed to the average wage index for 2009 ( which is $40,711.61). • Actual earnings are used for ages 61 and 62
  31. 31. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 30SOCIAL SECURITY SYSTEMAVERAGE INDEXED MONTHLY EARNINGS The indexing factor for a prior year is determined by dividing the wage index for the year the person reaches age 60 by the wage index for that prior year.– Example: Individual reaches age 60 in 2009. To determine the indexing factor for, say 1980 you would divide 40,711.61 (the index for 2009) by 12,513.46 (the index for 1980, from IRS tables) » Get an index factor of 3.2534. » If you made $12,000 in 1980, you would multiply this amount by 3.2534 to get an indexed amount of $39,041 for purposes of the 35 year average.
  32. 32. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 31SOCIAL SECURITY SYSTEMAVERAGE INDEXED MONTHLY EARNINGSOnce each year‟s earnings from age 22 to 62 are indexed, highest 35 years ofindexed earning are added up.– The sum is then divided by 420 to determine average monthly amount.– This is your AIMEIf you don‟t have 35 years of covered earnings– ADD ZEROS TO THE CALCULATION FOR EACH OF THE MISSING YEARS
  33. 33. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 32SOCIAL SECURITY SYSTEMPRIMARY INSURANCE AMOUNTOnce you have the AIME, the next step in determining monthly Social Security benefit iscalculating the Primary Insurance Amount (PIA)The PIA is the sum of three separate percentages of portions of AIME.– These portions are known as the bend points– The bend points depend on the year you reach age 62.If you reach age 62 in 2011, your PIA is the sum of:– 90% of the first $749 of your AIME, plus– 32% of your AIME between $749 and $4,517, plus– 15% of your AIME over $4,517. » This amount is rounded down to the next multiple of $.10.
  34. 34. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 33SOCIAL SECURITY SYSTEMPRIMARY INSURANCE AMOUNTExample:– If your AIME is $5,521 ($66,252 annually), your PIA would be calculated as:– 0.9(749)+0.32(4,517 – 749) + 0.15(5,521-4,517) = 2,030.46 which is rounded down to $2,030.40.Bend points for earlier years can be found on the SS website:– http://www.socialsecurity.gov/OACT/COLA/bendpoints.html– Note that lower wage earners receive a larger percentage of their preretirement income, while higher wage earners receive a lower percentage of their preretirement income.The PIA is then adjusted by automatic cost-of-living adjustments annually starting with theyear the worker turns 62
  35. 35. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 34SOCIAL SECURITY SYSTEMEARLY OR DELAYED RETIREMENT Once the PIA is calculated, we have the basis of determining the estimated monthly benefit amount. – This amount also depends on the actual age that you retire. – The earliest that you can retire and receive benefits is age 62. » If you retire early, your benefits are reduced for each month that you retire before your normal retirement age. » Conversely, if you delay your retirement beyond your normal retirement age, you will receive a certain percentage increase for each month that you delay retirement beyond your normal retirement age. The normal retirement age is the age that you receive the full benefits as indicated by your PIA – Determined by the year you were born (see next slide) – For most people today (unless you are over age 52), the normal retirement age is now 67. » It‟s 66 for those born from 1943 -1954
  36. 36. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 35SOCIAL SECURITY SYSTEMEARLY OR DELAYED RETIREMENT The normal retirement age (NRA) is the age at which retirement benefits (before rounding) are equal to the “primary insurance amount.” The table below shows how NRA varies by year of birth for retirees. – Source: http://www.socialsecurity.gov/OACT/ProgData/nra.html Normal Retirement Age Year of Birth Age 1937 and Prior 65 1938 65 and 2 months 1939 65 and 4 months 1940 65 and 6 months 1941 65 and 8 months 1942 65 and 10 months 1943-54 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
  37. 37. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 36 SOCIAL SECURITY SYSTEM EARLY OR DELAYED RETIREMENTIf you were to retire early, your benefit would be reduced by 0.555% for each month beforenormal retirement age, up to 36 months.If the number of months exceeds 36, then the benefit is further reduced by 0.416% permonth for each month thereafter.– This result is then rounded down to the next dollar to arrive at your reduced monthly benefit.
  38. 38. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 37 SOCIAL SECURITY SYSTEM EARLY OR DELAYED RETIREMENTExample:– Normal retirement age is 67; you retire at 63 » Retiring 48 months early. » Your benefit reduction is calculated as 36 months multiplied by 0.555%, plus 12 months multiplied by 0.416%. • Therefore, your monthly benefit would be reduced by 25%, and you‟d only receive 75% of your PIA. If your PIA were $1,983.10, your reduced benefit would be $1,487.33, which is then rounded down to $1,487.
  39. 39. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 38SOCIAL SECURITY SYSTEMEARLY OR DELAYED RETIREMENTOn the other hand, for most of us, if you were to delay retirement beyond your normalretirement age, you‟d receive an increase in your PIA of 0.666% per month of delayedretirement, or 8% a year.– The specific percentage of your increase based on your year of birth, can be found on the following slide
  40. 40. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 39SOCIAL SECURITY SYSTEMDELAYED RETIREMENT CREDITS Social Security benefits are increased by a certain percentage(depending on date of birth) if you delay your retirement beyond full retirement age. This benefit increase no longer applies when you reach age 70, even if you continue to delay taking benefits. Increase for Delayed Retirement Year of Yearly Rate Monthly Rate Birth of Increase of Increase 1933-1934 5.5% 11/24 of 1% 1935-1936 6.0% 1/2 of 1% 1937-1938 6.5% 13/24 of 1% 1939-1940 7.0% 7/12 of 1% 1941-1942 7.5% 5/8 of 1% 1943 or later 8.0% 2/3 of 1% Note: If you were born on January 1st, you should refer to the rate of increase for the previous year.
  41. 41. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 40SOCIAL SECURITY SYSTEMDELAYED RETIREMENT CREDITS Important point: If you decide to delay starting your Social Security benefits, be sure to – Sign up for just Medicare at age 65. If you do not sign up, in some circumstances your Medicare coverage may be delayed and cost more!
  42. 42. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 41SOCIAL SECURITY SYSTEMSPOUSE’S SOCIAL SECURITY RETIREMENT BENEFIT Any current spouse is eligible Divorced or former spouses are eligible generally if the marriage lasted at least 10 years. – Civil marriage of same sex couples are not recognized by OASDI for spousal benefits because the federal Defense of Marriage Act (DOMA) law excludes them for federal recognition. The spousal retirement benefit is half the PIA of the working spouse – This is different from the spousal survivor benefit, which is the full PIA. – The benefit is the product of the PIA, times one half, times the early retirement factor if the spouse is younger than normal retirement age. – There is no increase for starting spousal benefits after normal retirement age. » This can occur if there is a married couple in which the younger person is the only worker and is more than 5 years younger. Only after the worker applies for retirement benefits may the non- working spouse apply for spousal retirement benefit.
  43. 43. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 42SOCIAL SECURITY SYSTEMSPOUSE’S SOCIAL SECURITY RETIREMENT BENEFIT If spouses want to get Social Security retirement benefits before they reach full retirement age, the amount of the benefit is reduced. The amount of reduction depends on when the spouse reaches full retirement age. – For example: » If full retirement age is 65, a spouse can get 37.5% of the worker‟s unreduced benefit at age 62; » If full retirement age is 66, a spouse can get 35% of the workers unreduced benefit at age 62 » If full retirement age is 67, a spouse can get 32.5% of the worker‟s unreduced benefits at age 62. The amount of the benefit increases at later ages up to the maximum of 50 percentage at full retirement age. If full retirement age is other than those shown here the amount of the benefit will fall between 32.5% and 37.5% at age 62.
  44. 44. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 43SOCIAL SECURITY SYSTEMWIDOW(ER)’S BENEFITS If a worker covered by Social Security dies, a surviving spouse (or surviving divorced spouse) can receive survivors benefits. – A father or mother with minor or disabled children in his or her care can receive benefits which are not actuarially reduced. The earliest age for a nondisabled widow(er)‟s benefit is age 60. The benefit is equal to the worker‟s full retirement benefit (PIA) for spouses who are at, or older than, normal retirement age. If the surviving spouse starts benefits before normal retirement age, there is an actuarial reduction. If the worker earned delayed retirement credits by waiting to start benefits after their normal retirement age, the surviving spouse will have those credits applied to their benefit.
  45. 45. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 44SOCIAL SECURITY SYSTEMWIDOW(ER)’S BENEFITS Effect of Re-marriage – After age 60, a widow(er)‟s (or surviving divorced spouse‟s) remarriage will not prevent that individual from being entitled to benefits on his or her prior deceased spouse‟s social security record. – A widow(er)‟s (or surviving divorced spouse‟s) remarriage before age 60 will prevent entitlement (unless the subsequent marriage ends). So.........
  46. 46. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 45SOCIAL SECURITY SYSTEMWIDOW(ER)’S BENEFITS The CREATIVE USE OF DIVORCE – Example: Wife‟s high income earner husband died at her age 50 after 20 years of marriage » Widow (now) remarries at age 55 to an individual who has very low SS earnings. » Widow cannot collect on deceased husband‟s SS record since she remarried before age 60. What to do? – GET DIVORCED FROM THE NEW HUSBAND prior to age 60 » Say at age 59 11/12. » Quickie, no fault divorce – Apply for and collect widow‟s benefit on first husband‟s work record at age 60. » If you are not married at age 60, you are entitled. – Remarry second husband » Will be able to continue widow‟s benefit for life. » Don‟t need to tell anybody (except SS) about the divorce.
  47. 47. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 46SOCIAL SECURITY SYSTEMSHOULD YOU COLLECT WHILE YOU ARE STILL WORKING? Might seem like a good idea – Get paid from SS and your employer HOWEVER – For every $2 of income you make over $14,160 prior to reaching full retirement age » SS withholds $1 in benefits » Your monthly amount will be restored when you reach full retirement age, but you never get the reduced payments back.
  48. 48. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 47SOCIAL SECURITY SYSTEMSHOULD YOU COLLECT WHILE YOU ARE STILL WORKING? Example: – File for SS this year at age 62 and continue to work » Wages will be $32,000 a year – Assume monthly benefits at 66 (your NRA) would be $1,498. » You will get $1,123 at age 62 due to early retirement reduction – Your wages would drop that payment to $942 » A $181/month reduction – When you reach age 66, your payment goes back to $1,123 » You will never get the $1,498 because you started at age 62
  49. 49. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 48SOCIAL SECURITY SYSTEM.THE BIG DECISION: WHEN TO TAKE SOCIAL SECURITYSIMPLE QUESTION: No simple answer!Remember: the later you start, the bigger the benefit.The system is actuarially neutral (in theory, at least).– Live to an “average” age and you‟ll end up with the same total benefit no matter when you claim– Not really true: » Ex: women still live longer than men, but SS is unisex. • Therefore, women are more likely to live past the “break-even age”, whatever that is. » Ex: Income taxes may be paid on early distributions but not later ones.
  50. 50. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 49SOCIAL SECURITY SYSTEM.THE BIG DECISION: WHEN TO TAKE SOCIAL SECURITYAre there ANY rules of thumb that make sense?– If you are still working, don‟t claim benefits before your full retirement age. » The exceptions: • Need the payments to cover expenses NOW • Are experiencing health concerns or not expecting to live to the average life expectancy • Prefer to preserve other assets or investments • Are the lower-earning spouse while the higher earning spouse continues to be employed.
  51. 51. WHAT EVERY ONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 50SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITY Are there ANY rules of thumb that make sense? – Don‟t take Social Security until you are sure you want it. » Up until recently, there was a “do-over” strategy that got much attention. • You could file for benefits, collect and then pay them back later (without interest) and get your bigger check (including the inflation adjustments). • In effect, you had 8 years (from 62-70) to change your mind about taking early benefits. • It was truly an interest free loan from the government – Now, you only have 12 months to change your mind » Once in a lifetime option » No repayment allowed » Increase in benefits will be marginal
  52. 52. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 51SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITY Are there ANY rules of thumb that make sense? – Don‟t get hung up on the break-even date » That‟s the age you have to live to so that waiting to collect a bigger check pays off. » Depends on the discount rate you apply when valuing future benefits • Ex: Using a 2% discount rate, waiting until 66 instead of taking benefits at 62 pays off if you live until around 80 o Using a 4% rate, you must live until 84
  53. 53. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 52SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITY Are there ANY rules of thumb that make sense? – Don‟t get hung up on the break-even date » Doesn‟t take into account “hardy genes”. • One newer concept is that by waiting to claim a bigger check you are buying “longevity insurance” o Insurance against outliving your money o By waiting, you are effectively buying a larger inflation adjusted lifetime annuity for a lot less than you could buy it from a commercial Insurance company.  Even a low cost, non-commission provider.
  54. 54. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY 53BENEFITS & THE SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITY Are there ANY rules of thumb that make sense - continued? – The Couples Game » Can get really complicated » Understanding the SS rules is very important to make this work » Here we are utilizing the favorable way SS treats married couples • If a partner dies, the survivor can claim the deceased spouse‟s check instead of his or her own (assuming it is bigger). • We take the benefit of joint mortality o There‟s a greater chance with two individuals that at least one of them will live to a ripe old age and collect the bigger check • To make it work, at least one partner (usually, the higher earner) should delay benefits well past NRA to buy higher lifetime “second to die” annuity for the pair.
  55. 55. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 54SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITY Are there ANY rules of thumb that make sense - continued? – How about when both partners are still alive? » When you claim benefits, you get the greater of what you have earned on your own work record or up to half of your living spouse‟s full retirement benefit. » Low earning spouse taking early spousal benefits has an even bigger reduction than the primary wage earner • Claim at age 62, get 35% of the primary earner‟s PIA instead of 50%. • Remember: no extra benefits for waiting past full retirement age to claim check
  56. 56. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 55SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITY Are there ANY rules of thumb that make sense - continued? – How about when both partners are still alive? » Example: If working husband is four years older than wife, a one income couple would receive the maximum benefit if: • Husband claimed at age 70 • Wife claimed spousal benefits at 66.
  57. 57. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY 56BENEFITS & THE SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITYAre there ANY rules of thumb that make sense?– How about when both partners are still alive? » Claim Now, Claim More Later • Example: Working Husband is four years older than working wife: o Husband claims his full benefits at 66. o When wife reaches her full retirement age (four years later), she applies for spousal benefits, but keeps on working  First four years, they had only his check coming in o At age 70, she applies for her own SS benefits  From age 66 – 70, she‟ll get up to 50% of his benefits  At age 70, she‟ll get her own maximum benefits which will be worth 32% more than they would have been at age 66
  58. 58. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY 57BENEFITS & THE SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITYAre there ANY rules of thumb that make sense?– How about when both partners are still alive? » Claim Now, Claim More Later – another example • Example: Working husband is the same age as working wife (similar incomes): o Wife claims her full benefits at age 66 o Husband claims 50% spousal benefit, but keeps on working  They get two SS security checks from the beginning o At age 70, he applies for his own SS benefits  From age 66 – 70, he‟ll get 50% of her benefits  At age 70, he‟ll get his own maximum benefits which will be worth 32% more than they would have been at age 66.
  59. 59. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 58SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITY Are there ANY rules of thumb that make sense? – How about when both partners are still alive? » Claim and Suspend: • Suppose couple wants at least some cash coming in from SS before working spouse reaches age 70? o This is particularly attractive when only one spouse works OR when one spouse makes significantly more than the other o Example: Husband worked all his life, wife is a homemaker
  60. 60. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 59SOCIAL SECURITY SYSTEMTHE BIG DECISION: WHEN TO TAKE SOCIAL SECURITY Are there ANY rules of thumb that make sense? – How about when both partners are still alive? » Claim and Suspend (continued): • Husband can claim his benefits (at age 66) and then ask that they be immediately suspended! o Because he has claimed, his spouse is eligible for her spousal benefits • He can continue to work, and wait for the bigger benefit due to deferral at age 70. o Increases his benefits • Also increases her survivor benefits if he should die before she does
  61. 61. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 60SOCIAL SECURITY SYSTEMTIMING IS EVERYTHINGWhen a married couple files can mean a difference of $600,000 in lifetime benefits.The chart shows the cumulative amounts, including survivor benefits, that would bepaid by Social Security to a couple, now both age 61, based on when each startscollecting. In this example, the husband earns $84,000 a year and dies at 80, his wifeearns $53,000 and lives to 95 Timing is Everything $2,500,000 Cumulative Social Security Benefits $2,027,000 $2,000,000 $1,915,000 $1,500,000 $1,426,000 $1,000,000 $500,000 $0 Both at Age 62 She at Age 62 & He at Age 70 She at Age 66 & He at Age 70 Ages at which Spouses take Social Security Source; T.Rowe Price. Based on an average inflation rate of 2.8 percent. * Spousal benefit.
  62. 62. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 61 SOCIAL SECURITY SYSTEM TIMING IS EVERYTHING Timing is Everything $2,500,000Cumulative Social Security Benefits $2,027,000 $2,000,000 $1,915,000 $1,500,000 $1,426,000 $1,000,000 $500,000 $0 Both at Age 62 She at Age 62 & He at Age 70 She at Age 66 & He at Age 70 Ages at which Spouses take Social Security Source; T.Rowe Price. Based on an average inflation rate of 2.8 percent. * Spousal benefit.
  63. 63. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 62SOCIAL SECURITY SYSTEMTAXES Think SS benefits ARE ALWAYS TAX FREE? – THINK AGAIN! – They weren‟t ALWAYS subject to tax » Tax free until 1984 • Reagan-era reforms to repair the system‟s projected insolvency • For retirees with incomes over (simplified): o $25,000 (single), or o $32,000 combined (married filing jointly) • Part of the retiree benefits would be subject to Federal income tax. – In 1984, the portion of the benefits potentially subject to tax was 50% – Under the Deficit Reduction Act of 1993, the portion of benefits potentially subject to tax was increased to 85% beginning with the 1994 tax year.
  64. 64. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 63SOCIAL SECURITY SYSTEMTAXESCalculating the tax bite - not straightforward– Start with the Adjusted Gross Income (AGI) from your 1040 and add the following amounts: » 50% of your Social Security benefits. » Tax-free municipal bond interest income ( from line 8b of Form 1040). • Those are the two that apply to most taxpayers • But there are a bunch of others
  65. 65. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 64SOCIAL SECURITY SYSTEMTAXES Calculating the tax bite - not straightforward – Additional items added to AGI : » Tax free interest on U.S. Savings Bond used to pay for qualified college expenses (from IRS Form 8815) » Tax free adoption assistance payments from your employer (from IRS 8839). » The page 1 deduction for student-loan interest. » The page 1 deduction for higher education tuition and related fees. » The Page 1 deduction for domestic production activities (from IRS Form 8903). » Tax free foreign earned income and housing allowances and certain tax-free income from Puerto Rico or U.S. possessions (from IRS Forms 2555 and 4563). – The result of doing all this arithmetic is your provisional income for the year. » Your adjusted gross income » + non-taxable interest » + 1/2 of your Social Security benefits » = your “provisional income”
  66. 66. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 65SOCIAL SECURITY SYSTEMTAXES Calculating the tax bite - not straightforward – If your provisional income does not exceed the $25k/$35k amounts noted earlier: » Your Social Security benefits will be totally federal-income-tax-free • There are special income rules for married filing separately – If your provisional income is between: » $25,001 and $34,000 (single) » $32,001 and $44,000 (married filing jointly) • You must report up to 50% of your Social Security benefit as income on your Form 1040
  67. 67. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 66SOCIAL SECURITY SYSTEMTAXES Calculating the tax bite - not straightforward – If your provisional income is above: » $34,000 (single) » $44,000 (married filing jointly) o You must report up to 85% of your Social Security benefits as income on your Form 1040 – You still don‟t know exactly how much of your benefits must actually be reported as income on your return! – Trust me: you don‟t want to learn all the sordid details about how to figure that out. o Use on-line calculators; tax software; or your accountant o The full rules are in IRS publication 915
  68. 68. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 67SOCIAL SECURITY SYSTEMTAXES According to the SS Administration – Approximately 1/3 of the 52 million people who receive SS pay income taxes on their benefits – In 2010 more than $23.9 billion was collected » The calculation used to determine the taxable amount of SS has not changed since 1983 » The income break points used for this calculation have not been indexed to inflation for over 27 years The tax applies to SS disability and survivor benefits also – But if paid to dependent children, the calculation is done on their tax return.
  69. 69. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 68SOCIAL SECURITY SYSTEMTAXES - EXAMPLE Married Taxpayers; – If you are a married couple and receive $40,000 in SS benefits: » None of your benefits are taxable if your other income is less than $12,000. » For every dollar between $12,000 and $24,000, an additional 50 cents becomes taxable. » For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other income of 56,941, which makes the maximum $34,000 taxable. – The table below assumes that you have no dependents (exemption of $7,400) and take the standard deduction ($13,900 for a married couple over 65), so your first $21,300 of income is not taxable. Adjusted Non-SS Taxable Gross Taxable Tax Additional SS taxed Marginal Income SS Income Income Bracket for each $1 income tax rate 12,000 0 12,000 0 0% 0.5 0% 18,200 3,100 21,300 0 10% 0.5 15% 24,000 6,000 30,000 8,700 10% 0.85 18.50% 28,486 9,814 38,300 17,000 15% 0.85 27.75% 56,595 33,705 90,300 69,000 25% 0.85 46.25% 56,941 34,000 90,941 69,641 25% 0 25%
  70. 70. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 69SOCIAL SECURITY SYSTEMANNUAL SOCIAL SECURITY STATMENTS What happened to my annual Social Security Statement? – SS started sending annual earnings statement in 1999 to all workers age 25 and older » Required by law – OBRA „89 – SS mailed out 152 million statements in FY 2010. » They cost approximately $70 million per year to print and mail » Over 500,000 delivered every day » They were the largest customized mailing ever undertaken by a Federal agency. – SS stopped mailing statements during FY 2011 in a cost reduction effort. – SS has recently announced that the mailing of the statements will resume later this year.
  71. 71. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 70 SOCIAL SECURITY SYSTEMPURPOSE OF SOCIAL SECURITY One Leg of Three Legged Retirement Stool – Social Security is not intended to be the sole source of retirement funds.
  72. 72. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 71 SOCIAL SECURITY SYSTEMCHANGES BEING DISCUSSED: Benefits: – Create new minimum “floor” benefits for very low income earners – Means testing of benefits for higher earning recipients Personal Accounts – Very popular but seems unlikely in the short term because it will give rise to additional funding shortfalls Retirement Age – Gradual increase in normal retirement age from 67 to 70 – Gradual increase in early retirement age from 62 to 65
  73. 73. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 72 SOCIAL SECURITY SYSTEMCHANGES BEING DISCUSSED: Cost of Living – Change the way the COLA is calculated to reduce future increases in benefits Payroll Taxes – Donut Hole: Subject earned income up to Social Security wage base and earned income over $250,000 to 6.2% withholding rate – Eliminate Social Security wage base limit with respect to 6.2% withholding rate Other – Expand coverage by including new hired State and City employees in Social Security
  74. 74. WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 73SOCIAL SECURITY SYSTEM QUESTIONS?
  75. 75. BIOGRAPHY
  76. 76. Mark Spittell 75 2100 Ross Ave Suite 2100 Senior Director Dallas, TX 75201 Direct: (214) 438-1017 Mobile: (469) 585-1956 E-mail: mspittell@alvarezandmarsal.com Mark Spittell is a Senior Director with Alvarez & Marsal Taxand, LLC. He brings 25 years of experience in assisting companies with compensation and benefits issues. Mr. Spittell provides tax advice to company management regarding qualified and nonqualified retirement plans addressing such issues as plan design, best practices, resolution of regulatory compliance issues, performance of nondiscrimination testing, preparation of complicated regulatory filings, and assistance with IRS Voluntary Compliance Program filings. Mr. Spittell also has assisted clients with Department of Labor benefit plan investigations and inquiries Mr. Spittell performs payroll reviews for Federal and employment tax compliance and assists clients to resolve outstanding employment tax issues. In addition, he has extensive knowledge and hands on experience in most aspects of Voluntary Employee Beneficiary Associations (VEBAs) and welfare benefit plans. Prior to joining A&M, Mr. Spittell was a senior manager with KPMG. Previously, Mr. Spittell spent 11 years with the Internal Revenue Service as an Employee Plans Specialist. He served as Closing Agreement Coordinator for the Midstates Key District for over five years. In addition, as the Employee Plans Senior Reviewer, Mr. Spittell was responsible for reviewing and processing the largest and most complicated agreed and unagreed plan examinations and determination applications. Mr. Spittell received a bachelors degree in business administration from the California State University at Fullerton. He is a Certified Public Accountant and a Certified Pension Consultant.NOTE: Alvarez & Marsal employs CPAsbut is not a licensed CPA firm.
  77. 77. Doug Friesen 76 2100 Ross Avenue 21st floor Director Dallas, TX 75201 Direct: (214) 438-8435 Mobile: (469) 463-2779 E-mail: dfriesen@alvarezandmarsal.com Doug Friesen is a Director with the Compensation and Benefits practice of Alvarez & Marsal Taxand in Dallas. Mr. Friesen provides tax advice to corporate clients on executive compensation matters, including issues related to stock options, restricted stock, performance units, Golden Parachute rules, deferred compensation rules under IRC 409A, accounting for compensation awards and the one-million-dollar deduction limitation. Mr. Friesen also assists clients with qualified and non-qualified retirement plans, addressing issues such as plan design, performing nondiscrimination testing, mergers and acquisitions due diligence, and preparation of regulatory filings Prior to joining A&M, Mr. Griffin was a consultant with the executive compensation practice at Mercer Human Resource Consulting. While at Mercer, he worked with a broad group of clients, including Fortune 500 companies. Prior to joining A&M, Mr. Friesen was an Analyst with the Plan Design and Analysis Department of Clark Consulting, where he assisted in the design of non-qualified retirement plans, determined the appropriate corporate-owned life insurance financing solution, and created financial models to illustrate projected performance. Prior to Clark Consulting, he was an Internal Audit Consultant with Protiviti Consulting. Mr. Friesen earned a bachelors degree, cum laude, in finance, with a minor in economics, from the Kansas State University Business Honors Program.NOTE: Alvarez & Marsal employs CPAsbut is not a licensed CPA firm.
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