Write a one page essay on how Social Security retirement benefits are calculated and how are they taxed and do you think this fair?
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How Social Security is taxed: https://youtu.be/LHjDTqzNA5c
Social Security System Overview
Social Security – Your retirement benefits explained
The payroll tax (FICA) that funds OASDI is shared by employers and employees. The current tax is 6.2 percent for each. Self-employed workers pay both halves but receive a business expense deduction for the employer half of the tax paid. Taxes and benefits are based on the individual worker’s earnings, not family earnings. A beneficiary can receive benefits on only one worker’s account even if the person qualifies for more.
Funding for Social Security through tax revenue has been growing less rapidly than expenses, resulting in a trust fund that has begun to deplete. There is a combined trust fund for retirement and survivors accounts and a separate one for disability. The primary cause of this drain in the retirement/survivors accounts is the increased life expectancy of beneficiaries resulting in fewer workers per beneficiary. In addition, there has been an increase in survivors benefits unmatched by income increases. In 1940 the average worker surviving to age 65 had a life expectancy of less than 13 additional years. By 2025 that figure will be closer to 20 years.
There are currently about three years of expenses in the OASDI trust funds. This is expected to decline to two years of expenses in the funds by 2023. The economic impact created by Social Security being a net seller of U.S. debt instead of a net purchaser is a potential problem. That is, Social Security has been a lender to the U.S. government and will need to be replaced by other lenders. A number of steps have been proposed for solving the long-term fiscal problems of the system, including delaying full retirement benefits later than age 67, increasing the tax rate, reducing the rate of benefit increases, and transitioning the program to a funded privatized system.
Fiscal liberals argue that Social Security is a regressive tax because earnings above the wage base are not taxed. Fiscal conservatives see the benefits as regressive benefits because of the lower rate of benefits for higher earning individuals.
Benefit Requirements
Social Security Is More Than A Retirement Program
Social Security is often thought of as a retirement program, however many people receive Social Security because they are disabled, a spouse or child of someone who gets Social Security, a spouse or child of a worker who died, or a dependent parent of a worker who died. Each type of benefit has different requirements.
Retirement Benefit Requirements
Eligibility for Social Security retirement benefits is based on your age, how long you have worked, and how much you have earned in Social Security covered jobs during your working years. The following people are eligible:
- You are eligible for Social Security retirement benefits if you are an employee or a self-employed worker, age 62 or over, who has earned the required Social Security credits during your working years.
- If you qualify for Social Security retirement benefits, certain members of your family may be eligible for family benefits based on your work record. There are limits on the total retirement benefits a family can get. The following family members may qualify:
◦ A spouse who is 62 years of age or older
◦ A spouse who is under 62 years if he/she is caring for a child under 16 years or disabled
◦ Unmarried children under 18 years
◦ Unmarried children age 18-19, if they are full time students in high school
◦ Children of any age, if they are disabled from a disability that started before age 22
◦ A divorced spouse, unmarried, age 62 or older, and married to you for at least 10 years (payments to a divorced spouse are not counted toward the family benefit limit)
- To get Social Security retirement benefits based on your own work record, you need to earn at least 40 Social Security credits. Most people earn 4 credits per year, and have earned enough credits after 10 years of work.
- To earn a credit, you must make a certain amount of money. This amount changes each year. For 2013, a credit is added to your account for each $1160 you earn, up to a maximum of four credits per year.
- You cannot earn more than four credits in a year. Once you have earned 40 credits, you are fully insured and can start receiving benefits as early as 62 years of age. Workers born before 1929 need fewer credits.
- To get family benefits as the spouse, divorced spouse, or child of an insured family member, you do not have to earn any credits. However, the insured family member (your spouse, ex-spouse, or parent) must have at least 40 credits.
- The number of credits needed for survivor’s benefits depends on the age of the insured worker at death.
Disability Benefit Requirement
Disability Insurance is only for workers with the most severe disabilities and conditions, and uses a strict disability definition: inability to engage in “substantial gainful activity”—defined as being able to earn $1,040 a month in 2013—due to one or more severe physical or mental impairments that are expected to last at least a year or could result in death.
A worker’s impairment or combination of impairments must be so severe that the applicant is not only unable to do his or her previous work but also unable—considering his or her age, education, and work experience—to engage in any other kind of substantial gainful work that exists in significant numbers in the national economy.
Medical evidence is the cornerstone for the determination of disability. To qualify, there must be medical evidence from a doctor, specialist, or certain other licensed or certified medical sources that documents a severe impairment. Most applications for Disability Insurance are denied under this strict standard, and many workers with significant disabilities do not qualify. In order to receive Disability Insurance, a worker must have worked during at least one-fourth of his or her adult lifetime and during at least 5 of the 10 years before disability onset. There is also a five-month waiting period before a worker can qualify for benefits.
Supplemental Security provides assistance to people with severe disabilities who have very low incomes and assets and who either lack sufficient work history to be covered for Disability Insurance or receive only a very small Disability Insurance benefit. Many Supplemental Security beneficiaries, although not having the required work history required to be insured under Disability Insurance, they have worked and paid into the Disability Insurance system.
Workers must apply for and exhaust all other available benefits before qualifying for Disability Insurance or Supplemental Security. Therefore, Social Security’s disability programs serve as a true last resort for people with severe disabilities and little to no ability to work.
Retirement Benefits
Social Security Retirement Benefits
How do you qualify for retirement benefits?
When you work and pay Social Security taxes (FICA on some pay stubs), you earn Social Security credits. You can earn up to 4 credits each year. If you were born after 1928, you need 40 credits (10 years of work) to be eligible for retirement benefits.
How much will your retirement benefit be?
Your retirement benefit is based on your average earnings over your working career. Higher lifetime earnings result in higher benefits, so if you have some years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily. Your age at the time you start receiving benefits also affects your benefit amount. Although you can begin to collect retirement benefits as early as age 62, the longer you wait to retire (up to age 70), the higher your retirement benefit.
You can estimate your retirement benefit online based on your actual earnings record using the Retirement Estimator calculator on the Social Security website, www.ssa.gov. You can create various scenarios based on current law that will illustrate how different earnings amounts and retirement ages will affect the benefit you receive.
Retiring at full retirement age
Your full retirement age depends on the year in which you were born.
If you were born in:Your full retirement age is:
1943-195466
195566 and 2 months
195666 and 4 months
195766 and 6 months
195866 and 8 months
195966 and 10 months
1960 and later67
If you retire at full retirement age, you’ll receive an unreduced retirement benefit.
Retiring early will reduce your benefit
You can begin receiving Social Security benefits before your full retirement age, as early as age 62. However, if you retire early, your Social Security benefit will be less than if you wait until your full retirement age to begin receiving benefits. Your retirement benefit will be reduced by 5/9ths of 1 percent for every month between your retirement date and your full retirement age, up to 36 months, then by 5/12ths of 1 percent thereafter. For example, if your full retirement age is 67, you’ll receive about 30 percent less if you retire at age 62 than if you wait until age 67 to retire. This reduction is permanent, you won’t be eligible for a benefit increase once you reach full retirement age.
Still, receiving early Social Security retirement benefits makes sense for many people. Even though you’ll receive less per month than if you wait until full retirement age to begin receiving benefits, you’ll receive benefits several years earlier.
Delaying retirement will increase your benefit
For each month that you delay receiving Social Security retirement benefits past your full retirement age, your benefit will increase by a certain percentage. This percentage varies depending on your year of birth. For example, if you were born in 1936, your benefit will increase 6 percent for each year that you delay receiving benefits. If you were born in 1943 or later, your benefit will increase 8 percent for each year that you delay receiving benefits. In addition, working past your full retirement age has another benefit: It allows you to add years of earnings to your Social Security record. As a result, you may receive a higher benefit when you do retire, especially if your earnings are higher than in previous years.
Working may affect your retirement benefit
You can work and still receive Social Security retirement benefits, but the income that you earn before you reach full retirement age may affect the amount of benefit that you receive. Here’s how:
- If you’re under full retirement age: $1 in benefits will be deducted for every $2 in earnings you have above the annual limit
- In the year you reach full retirement age: $1 in benefits will be deducted for every $3 you earn over the annual limit (a different limit applies here) until the month you reach full retirement age
Once you reach full retirement age, you can work and earn as much income as you want without reducing your Social Security retirement benefit.
Retirement benefits for qualified family members
Even if your spouse has never worked outside your home or in a job covered by Social Security, he or she may be eligible for spousal benefits based on your Social Security earnings record. Other members of your family may also be eligible. Retirement benefits are generally paid to family members who relied on your income for financial support. If you’re receiving retirement benefits, the members of your family who may be eligible for family benefits include:
- Your spouse age 62 or older, if married at least one year
- Your former spouse age 62 or older, if you were married at least 10 years
- Your spouse or former spouse at any age, if caring for your child who is under age 16 or disabled
- Your children under age 18, if unmarried
- Your children under age 19, if full-time students (through grade 12) or disabled
- Your children older than 18, if severely disabled
Your eligible family members will receive a monthly benefit that is as much as 50 percent of your benefit. However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150 to 180 percent of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member’s benefit will be reduced proportionately. Your benefit won’t be affected.
Disability Benefits
What benefits will I get?
If you are eligible for Social Security Disability Insurance benefits based on your own work record, you will get:
- a monthly Social Security payment for as long as you are disabled and cannot work. The amount you get depends on your age, the number of years you worked, and the amount you earned in Social Security covered employment.
Note: If your disability began more than six months before you applied for SSDI, you may be eligible for “back benefits.” Applications for SSDI can be retroactive up to 12 months.
- Medicare coverage (Parts A and B), starting 24 months after you qualify for SSDI.
What benefits do family members get?
If you qualify for SSDI benefits, eligible members of your family can get benefits based on your work record:
- An eligible spouse or child can get a monthly benefit up to one-half of your monthly benefit.
- The total amount your family members can get is limited. The limit varies, but is between 150% and 180% of your benefit.
How much will I get each month?
Your SSDI benefits are based on your age and your average earnings during your working years. The more you earned during your working years, the higher your benefit will be, up to a limit. There is no minimum SSDI benefit amount.
To get an estimate of your SSDI benefit amount:
- View your Social Security statement online on the Social Security Administration web site. The statement shows your lifetime Social Security earnings and estimated disability and retirement benefits.
- Use an SSA online benefit calculator to estimate your disability benefits.
Note: The Social Security Administration has stopped sending Social Security Statements in the mail. For more information, call the SSA toll-free at 1-800-772-1213.
Extended Period of Eligibility:
Once your trial work period is up, you get 36 more months when you can work and still get SSDI benefits. These 36 months are called the extended period of eligibility, or EPE. During the EPE, you get SSDI benefits each month unless your earnings for that month are “substantial.”
In 2013, gross monthly earnings of $1040 or more ($1740 if you are blind) are considered “substantial.” This dollar amount is referred to as the SGA (“Substantial Gainful Activity”). If you have work expenses related to your disability, you may deduct them from your gross earnings.
Note: The definition of “substantial” earnings changes from year to year.
After the EPE:
After the extended period of eligibility, you lose your SSDI benefits if you earn more than the SGA in any month. If that happens, you get “grace period” benefits for three more months, but then your SSDI benefits stop. Social Security will no longer consider you disabled.
Expedited reinstatement:
If your SSDI benefits have stopped because you have “substantial” earnings, you have five years to make sure that you can keep working. During these five years, you can ask for your SSDI benefits back at any time if your disability prevents you from working. You do not have to reapply for SSDI or wait for a disability reevaluation.
Can I get both SSDI and SSI?
You can get both SSDI and Supplemental Security Income if the amount you get from SSDI is low. SSI is a need-based program, so you can get SSI benefits along with SSDI only if your total countable income including SSDI is less than the SSI income limit.
When you apply for SSDI benefits, Social Security should also check for SSI eligibility.
If you are getting Social Security benefits and are not sure if you are getting SSDI or SSI, look on your check to see if it says “Supplemental Security Income” or “Social Security Retirement, Survivors, and Disability Insurance.” You can also call Social Security toll-free at 1-800-772-1213 (TTY: 1-800-325-0778) and ask for a copy of your statement. Your Social Security statement will tell you the amount and type of benefits you are getting.
How long do SSDI benefits last?
You will get SSDI benefits as long as you continue to be disabled and cannot work.
If you are still eligible for SSDI when you reach full retirement age, your disability benefits will automatically be converted to Social Security retirement benefits.
Taxation
If the only income you received during the tax year was your social security benefits, your benefits are probably not taxable and you probably will not have to file a tax return.
Retirement Earnings Test
When people age 62 to full retirement age (currently 66) receive retirement benefits and continue to work, they face a limit on what they can earn before they have to “give back” some of their benefits.
In 2012, workers had to give back $1 in benefits for every $2 in earnings above the limit of $14,640. In 2013, that limit will rise to $15,120.
This formula applies only until the year in which the worker reaches full retirement age. For the months up to the month of the birthday, a different formula applies: In 2012, Social Security was holding back $1 in benefits for every $3 that such a worker earned above $38,880. In 2013, that limit will increase to $40,080.
The earnings limit goes away beginning the month that the worker reaches full retirement age.
Supplemental Security Income (SSI)
If you receive Supplemental Security Income (SSI) payments during the year, you should not include those payments in your calculations because they are not taxable for federal income tax purposes.