Session 2 Fundamentals of Social Security CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Session 2 Fundamentals of Social Security

Session Details Module 1 Chapter(s) 4 LOs 1-5 1-7 Identify and categorize basic provisions of an OASDI program: retirement, survivorship, and disability. 1-7 Analyze a given situation to calculate the taxation of Social Security benefits.

OASDI Old Age, Survivors, and Disability Insurance has three main components: Retirement (old age) Disability (disability of wage earner) Survivorship (death of wage earner)

Key Terms in OASDI Programs Quarter of coverage ($1,220 in 2015) Currently insured/Fully insured Average Indexed Monthly Earnings (AIME) Full retirement age (FRA) Primary Insurance Amount (PIA) Spousal benefit Benefit reductions due to age Benefit reductions due to earnings Events that trigger the end of benefits Divorced spouse coverage (married 10 years)

Full Retirement Age Born Full Retirement Age Age 62 Benefit Before 1938 65 80% 1938-1942 65 plus monthly adjustment 75-80% 1943-1954 66 75% 1955-1959 66 plus monthly adjustment 70-75% After 1960 67 70%

Benefit Reductions Due to Earnings Age You will lose Amount (2015) 62 to year of FRA $1 in benefits for every $2 of earnings above $15,720 Year you reach FRA $1 in benefits for every $3 of earnings above $41,880 After reaching FRA No benefit reduction Unlimited

Retirement Earnings Test Example Item Amount Total Social Security benefits (75% of maximum FRA amount) $23,967 Earnings $41,560 Social Security earnings limit (2015) $15,720 Excess earnings $25,840 Reduction in Social Security benefits (50% of excess earnings) $12,920 Net Social Security benefits $ 11,047

Qualifying for Social Security Disability Benefits Disabled worker must be fully insured (at least 40 quarters) and Have worked for at least 20 of the last 40 quarters

Qualifying for Social Security Survivor Benefits Deceased worker must have been either fully insured (40 quarters) or Currently insured (at least 6 of last 13 quarters)

Social Security Benefit Review Benefits will be paid to: Retirement Disability Death Worker, Under FRA Reduced* PIA 100% of PIA N/A Worker, FRA & Over Disability benefits cease; retirement benefits begin Spouse, age 60 or 61 No benefit 100% of PIA, reduced Spouse, age 62 to FRA 50% of PIA, reduced 100% of PIA, reduced Spouse, FRA or older 50% of PIA Spouse, any age, caring for child under age 16 or disabled 75% of PIA, reduced (worker was currently insured) Unmarried child under age 18 (19 if in high school) or any age if disabled 50% of PIA (subject to family maximum) Slide assumes age 65 as NRA

Johnson Family Example Robert Johnson died at age 35. Survivors are: Wife, Jane (age 35). Daughter, Juli (age 6). Son, Bobby (age 3). His PIA is $1,200. Maximum family benefit is $2,250.

Family Limits Jane’s Age Juli’s Benefit, 75% of PIA Reduced to $750 Bobby’s Benefit, 75% of PIA Reduced to $750 Jane’s Benefit, 75% of PIA, Reduced to $750 Widow(er)’s Blackout Period* Jane’s SS = 71.5%† PIA $1,200 PIA X 75% = $900 $2,700 $2,250 family max. $450 reduction 35 40 45 47 48 50 55 60 65 66 Jane’s Age *If widow(er) is disabled within seven years of spouse’s death. Social Security payments may begin at age 50. † If benefits begin at 60. 71.5% PIA; at 62.75% PIA: at 65, 100% PIA.

Income Tax on Social Security Benefits Threshold income: joint filers Threshold income: single filers Percent of Social Security retirement benefit subject to income tax Less than $32,000 Less than $25,000 None $32,000 to $44,000 $25,000 to $34,000 Up to 50% Greater than $44,000 Greater than $34,000 Up to 85%

Income Tax on Social Security Benefits Thresholds are arrived at by using “provisional income.” The main components of provisional income are: AGI Tax-exempt interest income (muni bonds) One-half of OASDI benefits

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAM Retirement Planning & Employee Benefits Session 2 End of Slides