1. http://www.ssa.gov/OACT/pubs.html Lecture 4 Social Security Benefits
Introduction
Incentives Generated
Retirement Benefits
Survivorship Benefits
Disability Benefits
Benefit Determination

2. Where Do We Start? Taxation Self Interest of Decisionmakers
Changing Demographics

3. Taxation
The Social Security tax is paid by both the employer and the employee.
For 2000, this tax is 7.65% of the first $76,200 of earnings plus 1.45% of any additional earnings.
This tax is not deductible for employees.

4. Example
If you earn $40,000 in 2000, you pay $3060 in Social Security taxes. Your employer also pays $ The government collects a total of $6120 based on your earnings (or 15.3%).
You pay income taxes to both the federal government and the state government on your $40,000 salary, even though you only earned $36,940 after paying your Social Security tax.

5. Taxation of Benefits 2000 Provisions
Calculate modified adjusted gross income (MAGI a.k.a. provisional income)
Adjusted gross income
Tax exempt interest
Portion of Social Security benefit (50% or 85%)
Benefits are tax exempt if MAGI is:
$25,000 or less (single)
$32,000 or less (married)
Up to 50% of benefits are taxable if MAGI is:
between $25,000 and $34,000 (single)
between $32,00 and $44,000 (married)
Up to 85% of benefits are taxable if MAGI is:
over $34,000 (single)
over $44,000 (married)

6. Social Security Normal Retirement Age
Year of birth Normal retirement age
1937 and prior
and 2 months
and 4 months
and 6 months
and 8 months
and 10 months
and 2 months
and 4 months
and 6 months
and 8 months
and 10 months
1960 and later
Note: Persons born on January 1 of any year should refer to the normal retirement age for the previous year.

7. Earnings Test Social Security benefits are reduced: Limits for 2000
$1 for every $2 of excess earnings if under NRA
$1 for every $3 of excess earnings if worker attains NRA in 2000
Limits for 2000
Under NRA $10,080
If worker attains NRA in 2000 $17,000
Over NRA no limit

8. Earnings Test Example
A 62 year old retiree is entitled to $700/month in Social Security benefits, or $8400/year.
This retiree takes a part time job that pays $10,080 a year. At the end of the year, the retiree’s part time employer gives him a $1000 bonus.
The cost of this bonus is:
Reduced SS benefit
SS tax (7.65%)
Federal taxes (28%)
State taxes (3%)
Total cost

9. Earnings Test Example - (cont.)
Assume the retiree has a 60 year old spouse with a full time job earning $17,720. The couple has no interest income (either taxable or tax-exempt).
In this case, the extra $1000 costs the retiree $ ( ) in taxes and penalties.

10. Self Interest of Congress
Introduction of program
Benefit increases
Current issues

11. Changing Demographics
Basic structure of the plan
Social Security as a Ponzi scheme
Effect of baby-boomers
Penalty for dual income couples

12. Social Security Income and Cost Rates

13. Social Security Benefits
Retirement
Retiree
Spouse if 62
Dependent children
Survivorship
Spouse if 60 or if caring for dependent children
Dependent parents
Disability
Worker
Spouse

14. Benefit Determination
Average Indexed Monthly Earnings
Primary Insurance Amount
For 2000:
90% of first $531 of AIME
32% of AIME between $531 and $3202
15% of AIME over $3202
Replacement rates range from 26% to 53% of pre-retirement earnings