Social Security

In 1935 Social Security was created as a response to the deep pain caused by the Great Depression.  In the last 75 or more years it has become an important part of retirement which is at times complicated to the point that you need the assistance of a legal expert referred to as an elder law attorney.  What we know today as the Social Security retirement program is actually several programs which provide separate rules for eligibility and payments for retirement, disability, survivors and dependents benefits.

What most people think of as social security is also formally Old-Age and Survivors Insurance (OASI). This program provides income to retired people and benefits to surviving spouses of those eligible and also to the retired workers children under age 18.  About 30 to 40 million former workers are receiving benefits under social security.

Social Security retirement benefits are paid for through payroll taxes paid by workers and employers. The tax is about 15 percent payroll tax and is known as Federal Income Contribution Act taxes (FICA).

For most retired workers and their dependents, however, Social Security retirement benefits alone are not enough for them to maintain the standard of living they had before retirement. Although Social Security retirement benefits are protected against inflation by annual Cost of Living Adjustments, the average retirement benefit for retirees is only about $1,153 a month, and the survivors of workers receive an average of only $1,112 a month (2011 figures). For 2011, the maximum monthly Social Security retirement benefit for a worker retiring at the full retirement age of 66 years was $2,346. Because of low inflation, retirement benefits for 2011 have remained unchanged from their 2010 levels despite premium increases by Medicare and many prescription drug programs.

Who Gets Social Security Benefits

One important aspect of social security is that it is distributed not based on need but based on the taxes paid by the working person during their life time.  The Social Security Administration (SSA) keeps a record of earnings over your working life and pays benefits that are based on the average amount earned, provided a minimum number of work credits have been accumulated. Only income on which Social Security tax is paid is considered in calculating these work credits. To be eligible for Social Security retirement benefits, a worker must have at least 40 quarters of work under which contributions or taxes were paid by the worker and by their employer.

Payments under social security are paid at “retirement” and retirement is defined as whenever you choose to begin receiving benefits after you reach age 62–whether or not you are actually still working. Starting at age 62 you can begin receiving benefits, provided you have accumulated the minimum required quarters of coverage (although you will pay a penalty for retiring before your “full retirement age,” as explained in the following section). You do not have to actually stop working to be eligible to receive Social Security retirement benefits, although if you have not yet reached your full retirement age your benefits may be reduced depending on how much income you earn. Conversely, you can stop working entirely and still postpone receiving Social Security retirement benefits (see The Delayed Retirement Option below). However, if you stop working, your average earnings over your working life may be less and this may result in a reduced benefit.

If you have not received the information already, you can find out how many quarters of coverage you have accumulated and what your estimated benefit will be at the time of retirement by requesting Social Security Statement SSA-7004 (formerly known as the Personal Earnings and Benefit Estimate Statement) from the SSA. You can request a copy by mail or online by visiting the SSA Web site or watch for one in the mail; they are sent out annually three months before your birthday. There is no charge for this service, and in addition to your quarters of coverage the statement will provide your earnings reported in each year. You can also calculate your future Social Security retirement benefit based on your current and projected earnings by using the SSA’s online Benefits Calculator. In addition, click here for an online calculator that allows you to project what your monthly benefit will be based on your actual work record.

Early Retirement and Reduced Benefits

If you choose to begin receiving benefits at any point between age 62 and your full retirement age, you will pay a price in reduced monthly benefits for the rest of your life. If you take the early retirement option, your benefits will be reduced 5/9 of one percent for each month before your full retirement age that you begin receiving benefits, up to 36 months. For each month above 36 months before your full retirement age, the reduction formula is 5/12 of one percent. You will receive this reduced benefit (plus cost of living adjustments) for as long as you receive Social Security retirement benefits. Although most recipients take the early retirement option, whether you should depend on your need for income, the availability of other income sources, and your health and likely longevity.  Just as you pay a penalty for receiving benefits early, you receive a bonus for delaying their receipt beyond your full retirement age. All other factors bering equal, the longer you expect to live, the longer you should delay starting to receive your Social Security retirement benefits. How much your deferment of benefits will increase your monthly check when you ultimately retire depends on your year of birth. If you delay your retirement beyond age 70, you will receive no further increases in your PIA, no matter how long you continue to work.

Social Security and Medicare

Whether or not you opt to get social security retirement benefits early or not, you should remember to sign up for Medicare at age 65. You should do this during the period beginning three months before your 65th birthday and ending three months afterwards.

Benefits to Spouses and Children

Most people do not realize that Social Security, besides paying retirement benefits for the retired worker, can provide benefits to the worker’s spouse, an ex-spouse if the marriage lasted at least 10 years, and dependent children and grandchildren, depending on the circumstances. Moreover, these benefits can be paid all at the same time.  Your spouse is entitled to an amount equal to one-half of your full PIA. In order to receive this benefit, your spouse must be at least 62 years old or caring for your child who is under age 16. Also, you must have filed for Social Security retirement benefits (though you do not need to be receiving benefits) in order for your spouse to receive them as well. It may be that your spouse could receive more from Social Security based on her own earnings record than through your spousal benefit. If this is the case, the Social Security Administration automatically provides your spouse the larger benefit.  If you retire early, your spouse will still receive benefits based on one-half of the PIA you would have received had you waited until full retirement age to retire. But in order to receive a full half of your PIA, your spouse must wait to begin receiving the retirement benefits at her full retirement age. If she opts to receive benefits before that time, she will be penalized according to a formula similar to that used to compute the reduced benefits of workers who retire early.

Benefits to children and grandchildren who are unmarried and dependent upon you the retired worker for their support are eligible for benefits. To be eligible, the child must be under age 18, under age 19 but still in elementary school or high school, or over age 18 but have become mentally or physically disabled prior to age 22.  Children generally receive an amount equal to one-half of your PIA, up to a “family maximum” benefit. The family maximum is calculated when you reach age 62, and is determined by a formula similar to that used to determine the PIA. The family maximum depends on the amount of your benefit and the number of family members who also qualify on your work record. The total varies, but it is generally equal to about 150 to 180 percent of your retirement benefit. Every January 1 the family maximum benefit may be increased to reflect a rise in the cost of living.  Divorced spouses benefits: If you are the retired worker, your divorced spouse is eligible to receive an amount equal to one-half of your PIA, provided the marriage lasted at least 10 years. The rules are similar to those for spousal benefits described above, with two notable exceptions. First, your divorced spouse can begin receiving benefits even before you have begun receiving benefits yourself. The SSA does require, however, that you be at least 62 years old and that the divorce have been final for at least two years if you have not yet reached full retirement age. Second, your divorced spouse’s benefits are not counted in your “family maximum” benefit described above, and they do not affect that maximum.

Benefits for a surviving spouse are paid if you die and your spouse has by that time reached full retirement age.  This is true even if you and your spouse have divorced, so long as you had been married for at least 10 years. If your surviving spouse has not yet reached full retirement age but is at least age 60, she receives an actuarially reduced percentage of your benefits.

Apply for Benefits

You should apply for benefits from social security three months before you want to receive them per the advice of the Social Security Administration.  Even if you have no plans to receive retirement benefits, you should still sign-up for Medicare three months before age 65.

You can apply for retirement benefits online. Connect to the Internet Retirement Insurance Benefits application and follow the instructions. You can also apply by calling the SSA’s toll-free number, 1-800-772-1213.

The information you need to apply is – your Social Security number; your birth certificate; your W-2 forms or self-employment tax return for last year;  your military discharge papers if you had military service; your spouse’s birth certificate and Social Security number if he or she is applying for benefits; children’s birth certificates and Social Security numbers, if applying for children’s benefits; proof of U.S. citizenship or lawful alien status if you (or a spouse or child is applying for benefits) were not born in the U.S.; and the name of your bank and your account number if you want your benefits directly deposited into your account.

Taxes on Benefits

Although Social Security retirement benefits are generally not taxable, people with substantial income in addition to their Social Security payments may pay taxes on their benefits. If you file a federal tax return as an individual and your “combined income,” including Social Security benefits and nontaxable interest income is between $25,000 and $34,000, 50 percent of your benefits will be considered taxable. If your combined income is above $34,000, 85 percent of your benefits are subject to income tax. If you file a joint return and you and your spouse have a combined income between $32,000 and $44,000, 50 percent of your benefits will be subject to tax. If your combined income is more than $44,000, 85 percent of your benefits are subject to income tax.

Disability Benefits

Disability benefits are available to qualified recipients under two programs, Supplemental Security Income (SSI) and Social Security Disability Income (SSDI). See Disability Planning section for an explanation of SSI. As of December 2009, some 8.9 million disable workers and their dependents were receiving benefits through SSDI. SSDI pays cash benefits to people who are unable to work for a year or more because of a disability. Benefits continue until you are able to work again on a regular basis, or until you reach retirement age. At that point, the disability benefits automatically convert to retirement benefits, but the amount remains the same. After receiving SSDI benefits for two years, you also become eligible for health insurance coverage under Medicare. The disability program also includes a number of work incentives to ease your transition back to work.

Who is eligible?

As with retirement benefits, you must have accumulated a certain number of work credits before you can qualify for SSDI disability benefits. However, fewer credits are required to qualify for the disability program than for retirement. You can earn up to four credits per year of employment. How many credits you need to qualify for disability depends on the age you become disabled.

Before age 24: You may qualify if you have six credits earned in the three-year period ending when your disability starts.

Age 24 to 31: You may qualify if you have credit for having worked half the time between age 21 and the time you become disabled. For example, if you become disabled at age 27, you would need credit for three years of work (12 credits) out of the previous six years (between age 21 and age 27).

Age 31 or older: In general, you will need to have accumulated the number of work credits shown in the chart below. Unless you are blind, at least 20 of the credits must have been earned in the 10 years immediately before you became disabled. If you are disabled by blindness, your work credits can be from any time after 1936.

Certain members of your family may qualify for disability benefits on your work record should they become disabled. The amount of these benefits depends on your earnings record. These family members include:

  • Your spouse who is age 62 or older, or any age if he or she is caring for your child who is under age 16 or disabled and also receiving checks;
  • Your widow or widower or divorced spouse (if the marriage lasted at least 10 years) age 50 or older should he or she become disabled. The disability must have started before your death or within seven years after your death;
  • Your unmarried son or daughter, including an adopted child, or, in some cases, a stepchild or grandchild.

When is a child entitled to disability benefits?

Children under age 18 who are disabled may be eligible for childhood disability benefits if their parents have a disability or are deceased and were insured at the time of death. An unmarried disabled child who is older than age 18 may be eligible for benefits if the disability began before age 22. There is no upper age limit for childhood disability benefits.

In addition, unmarried children are entitled to child’s insurance benefits on the Social Security record of their disabled or deceased parents if the child is under age 18 or between age 18 and 19 and a full-time student.

Who is “disabled”?

The Social Security Administration uses a strict definition of disability. The program does not pay for partial disability or short-term disability. To qualify for benefits under SSDI, your disability must prevent you from doing any substantial gainful work, and it must last or be expected to last a year or to result in death.

Despite the rule that the disability must be expected to last a year, you should apply for benefits as soon as the condition becomes disabling and your doctor is willing to state in writing that it is expected to last at least a year. If it turns out that you recover sooner than expected, the SSA will not ask for its money back.

Older workers who become disabled tend to have an easier time having their claims approved. The SSA recognizes that it is more difficult for older workers to be retrained or to find new employment. In addition, the agency knows that a disabled worker who is, say, 60 years old and will be receiving retirement benefits in a few years anyway will cost it less in benefit outlays than a younger worker would.

Getting Help With Social Security Decisions

If your application for benefits from any Social Security program is denied or you are receiving less than you believe you deserve, you can appeal. Appeals are most common with disability claims. A large percentage of decisions are changed in the appeal process. For example, almost half of all disability claim appeals are resolved in favor of the beneficiary. There are four stages of the appeal process, and you must go through each before you can move to the next. They are: request for reconsideration, a hearing before an administrative law judge (ALJ); a request for review of the ALJ’s decision by the Social Security Appeals Council in Washington, D.C.; and, finally, a lawsuit filed in federal court. At each stage in the process, you have 65 days from the date on a written notice of the Social Security Administration’s decision at the previous stage to let the SSA know that you are appealing to the next stage.