At the January 26, 2006, ENG meeting Diana Reiser, a Social Security Administration (SSA) employee at the Mt. Prospect, Illinois offices and an expert in Title II spoke to the membership concerning the history of the SSA, benefit calculation, and issues relating to early and full retirement.

Ms. Reiser’s PowerPoint presentation noted that SSA started in 1935, collecting taxes for the commencement of benefits in 1936 for persons retiring at age 65. In 1939 survivor benefits for widows and orphans were added. In 1956 benefits for the disabled were added. 1965 saw the onset of Medicare. In 1972 Supplemental Social Security benefits were introduced.

Social Security payments were and are not intended to replace the wage earnings of beneficiaries, but they are presently the major source of income for most elderly. As pointed out in the presentation, and as made clear on the informative website, www.socialsecurity.gov, more than 48 million Americans were to receive $518 billion in benefits in 2005. As of June 2005, this was composed of 30 million retirees, 3.1 million of their dependents, 6.4 million disabled workers, 1.7 million of their dependents, and 6.6 million survivors.

In 1960 there were 5 workers for each beneficiary, three workers for each beneficiary in 2004 and in 2030 trends predict about 2 for each beneficiary. America is changing in other ways: the life expectancy of a 65 year old person in 1935 was 12.5 years; today it is 17.5 years. By 2030 there will be almost twice as many Americans over 65 as now, to 71 million from 37 million.

Social Security has cost of living increases built in: in 2006 benefits will rise 4.1%. Social Security is financed through a dedicated payroll tax, which is paid equally by employer and employee, at 6.2%, while the self-employed pay 12.4%. In 2004, 84% of Social Security distributions came from payroll taxes, 14% from interest earnings on Social Security trust fund receipts not yet distributed, and 1% from taxes on certain benefits.

According to the presentation and website, by 2017, no interest will be earned on the Social Security trust funds, and by 2041 the trust funds will be exhausted, and additional revenues will be required to support the program. Without changes, there will only be enough money to pay 73% for each dollar of benefits at that time as pointed out by Ms. Reiser and in the pamphlet “Understanding The Benefits”, page 5, distributed after the meeting. Please note that this publication, as well as many others is available on line at www.socialsecurity.gov.

Ms. Reiser then explained how retirement benefits are calculated, which are also shown on the website under “How credits are earned”. When you work and pay Social Security Taxes, you earn up to four (4) “credits” each year. The way you earn a credit has changed over the years, and the amount of earnings it takes to earn a credit changes each year. According to the website in 2005 you must have earned $920 to get one Social Security or Medicare work credit, and $3680 for the maximum four credits. This rises in 2006 to $970 and $3880 respectively. Most people need forty (40) credits (10 years of work) to earn a benefit; the pamphlet “Understanding The Benefits”, page 8, provides an explanation.

Full retirement age depends on birth date; see “Understanding The Benefits”, page 10 for a chart with the yearly data. For those born between 1943 and 1954, full retirement age is 66. Early retirement benefits, at age 62, are available with a reduced benefit, and delayed retirement may lead to higher benefits. Please see “Understanding The Benefits”, page 11 for more information. Spouses, and former spouses, and children may also be eligible for benefits, as set forth in “Understanding The Benefits” pages 12-16.

Social Security benefits are calculated based on wage earnings, adjusted for inflation, over the 35 years you earned the most. (More information on this subject is available on that part of the website for frequently asked questions, under “How are my retirement benefits calculated?”).

Ms. Reiser noted that higher paid workers receive on the average, a lower percentage of their wages as their retirement benefit than lower paid workers, with lower paid workers receiving as their retirement benefit 57% of earnings. Middle paid workers receive on the average 43% and higher paid workers receiving as their retirement benefit less than 40% of their wages.

Ms. Reiser noted that if a person received a government pension, which is not based on Social Security, there is a “Double Dipping” or “Windfall Elimination Provision” penalty. The website contains additional information on this subject.

After applying for Social Security benefits one can continue to earn wage income, which, depending on the amount can significantly affect the retirement benefit. In the event one earns over $12,480 in 2006, $1 in benefits for every $2 in earnings will be deducted. (More information is available on this complex subject in the pamphlet “What You Need To Know When You Get Retirement Or Survivors Benefits”, pages 12-17, distributed after the meeting. See also question 10 and the answer.)

When you apply for benefits, you will need your Social Security Card, birth certificate, most recent W-2 form and possibly other documents. Please see “Understanding The Benefits”, page 17 for additional information.

As noted above, widows, widowers, parents and children can receive benefits under certain circumstances. Please see “Understanding The Benefits”, pages 14-16 for additional information. There is also a lump sum payment after death of $255; please see “Understanding The Benefits”, page 15 for additional information.

Disability benefits are available if one cannot work because of a physical or mental condition expected to last one year or result in death. Please see “Understanding The Benefits”, page 13 for additional information.

Ms. Reiser briefly discussed the subject of Medicare. Medicare is available to those 65 or older and many people with disabilities. Medicare has two parts. Hospital insurance (Part A) helps to pay for inpatient hospital care and certain follow-up services, and Medical insurance (Part B) that helps to pay for doctors’ services, outpatient hospital care and other medical services. Please see the website www.medicare.gov for additional information. You may also read “Understanding The Benefits”, pages 19-20 for a very brief explanation.

Each year Social Security sends “Your Social Security Statement”, an estimated benefit statement to those who have not elected to receive Social Security retirement benefits. Please review “Your Social Security Statement” for accurate reports as to wage income reported by employers for each year because there may be inaccuracies that should be corrected and which may affect your benefits.

The audience applauded the well-prepared presentation. Ms. Reiser then took questions.

How does deferred compensation affect a retirement benefit?

Ans. The answer is given in several parts. (a) 401K income should not affect a retirement benefit. (b) Incentive payments will be counted on the last day of employment. (c) Severance pay is not counted as continuing income, because the individual is no longer an employee.

What are the Military Service Rules?

Ans. The Military Service Rules have changed and you should contact Social Security for these.

Can stock options affect Social Security benefits?

Yes. But if Social Security taxes are not paid on the exercise, the benefits should not be affected.

Will the benefit increase in the event a beneficiary reaches full retirement age 42 months after early retirement?

Ans.No. Benefits will not change due to that fact alone.

Is there a maximum Social Security payment?

Ans. Not per se. The annual benefit may be increased or decreased, depending on occurrence of various factors.

Is there a maximum lifetime retirement Social Security Benefit.

Ans. No. You may continue to receive benefits long after your tax contributions have been received.

What is the average Social Security retirement age?

Ans. I don’t have that information currently.

Some people recommend starting Social Security benefits at 62, and not waiting for 65/66, or later due to difficulty in later accruing the sum one would have obtained for the lost years.

Ans. One might have great difficult in obtaining through higher, later payments the sums earned for those years in which the person could have but did not elect the benefit. The Social Security benefit receipt is usually delayed for a month or two after the month in which the right to receive the Social Security benefit occurs. 

For those years a person did not work, are those years counted as “0” in the 35-year count for benefit calculation?

Ans. Yes. Each of those years is included in the 35-year count. 

Following commencement of benefits, until full retirement age is reached, if the beneficiary receives any wage income, will this halt Social Security benefits until the end of that benefit year, when wage income for the entire year can be calculated? If so, when will this benefit be paid?

Ans. Generally, you will be subject to the rule. (The publication “How Work Affects Your Benefits” contains the following example. Suppose you begin receiving benefits at age 62 in January 2005 and your payment is $600 per month ($7200 per year). During the year you work and earn $20,000 ($8000 above the $12,000 limit then in effect). We would withhold $4000 of your benefits ($1 for every $2 you earn over the limit), but you would still receive $3200 in benefits. The calculation is made on the basis of the full year’s earnings.

Prepared by Robert Cannon 1/27/06