BC: SOCIAL INSECURITY .. FUN FACTS
..
..
..
..
..
..
..
..
..
..
..
..
..
..
..
In 2003, the federal government spent a total of $479 billion on the Social Security program. That year, about 47 million people received Social Security benefits: 29.5 million retired workers; 5.9 million disabled workers; and 11.6 million family members of retired, disabled, or deceased workers. Social Security has two components. The Old-Age and Survivors Insurance (OASI) program provides benefits to retired workers, members of their families, and their survivors; the Disability Insurance (DI) program pays benefits to disabled workers younger than the normal retirement age and their dependents. OASI is by far the larger program; last year it accounted for about 85 percent of spending for the two parts combined (referred to as OASDI). On average, retired workers received a monthly OASDI benefit of about $922 in December 2003; disabled workers received an average of $862 in DI benefits.
Benefits are financed primarily through payroll taxes, with half collected from employers and half from workers. The combined rate, currently 12.4 percent, is levied on wages and self-employment income covered by the OASDI program, up to a maximum of $87,900. (That threshold rises annually with average earnings in the economy.) Last year, 154 million workers were covered by Social Security, earned taxable wages of $4.3 trillion, and paid $534 billion in Social Security payroll taxes.
The Social Security system also is credited with the income taxes that approximately one-third of its beneficiaries (those with the highest income) pay on their Social Security benefits. Such revenues totaled about $13 billion in 2003.
How Benefits Are Calculated
All Social Security benefits are based on a worker's primary insurance amount (PIA). In turn, the PIA depends on a measure of a worker's career earnings in employment subject to the Social Security payroll tax, expressed as his or her average indexed monthly earnings (AIME).
AIME. For people who attain age 62 after 1990, the AIME is calculated based on the highest 35 years of earnings on which the individual paid Social Security taxes (up to the taxable maximum, which is $87,900 in 2004). Earnings before age 60 are indexed to compensate both for inflation and for real (after-inflation) growth in wages, and earnings after age 59 enter the computations at their actual levels. Dividing the total earnings by 420 (35 years times 12 months) yields the AIME.
PIA. The PIA is the monthly amount payable to a worker who begins receiving Social Security retirement benefits at the age at which he or she is eligible for full benefits or payable to a disabled worker who has never received a retirement benefit. (The age of eligibility is discussed in the next section.)
The PIA formula is designed to ensure that initial Social Security benefits replace a larger proportion of preretirement earnings for people with low average earnings than for those with higher earnings. For workers who turn 62, become disabled, or die this year, the formula is:
PIA = (90 percent of the first $612 of the AIME) + (32 percent of the AIME between $612 and $3,689) + (15 percent of the AIME over $3,689)
The thresholds at which the percentage of the AIME changes are known as "bend points." They change each year along with changes in the average annual earnings for the labor force as a whole. Consequently, as wages rise over time, initial benefits increase at a similar pace.
Workers who are 62 now, who had average earnings throughout their career, and who wait to claim benefits until they reach the age at which they will be eligible for full benefits (65 and 10 months for this group) will receive a monthly benefit of $1,321. That payment will replace about 41 percent of their earnings in the year before they claimed benefits. If, instead, they claim benefits this year soon after their 62nd birthday, they will be eligible for a permanently reduced benefit of $942 a month. That amount will replace about 34 percent of their pretax earnings last year.
In addition, at the end of each year, SSA adjusts the PIA by the amount of any increase in the consumer price index (CPI). The 2.1 percent cost-of-living adjustment that took effect in December 2003 reflected the increase in the CPI for urban wage earners and clerical workers (CPI-W) that occurred between the third quarter of 2002 and the third quarter of 2003.
Because of Social Security's indexing rules, the payments received by newly eligible beneficiaries reflect both increases in prices and real growth in earnings throughout the economy during the years that those beneficiaries worked. Later increases in their payments--through annual COLAs--reflect only increases in prices after the beneficiaries became eligible for benefits. Thus, as long as real wages continue to rise, new beneficiaries will generally receive higher real benefits than older beneficiaries.
Monthly Benefits. The PIA governs all benefits paid under Social Security. A retired or disabled worker may receive 100 percent of the PIA; a spouse or child of a retired or disabled worker may receive 50 percent of the worker's PIA. For survivors, the rules differ for elderly surviving spouses and for younger widows and widowers who are caring for the deceased worker's children. The former may receive 100 percent of the worker's PIA, while the latter may be eligible for 75 percent. Eligible surviving children similarly may receive 75 percent of the PIA. The actual percentages any of these beneficiaries receive often differ from those percentages for a variety of reasons, as discussed below.
Early and Delayed Retirement. Under current law, the age at which a worker becomes eligible for full Social Security retirement benefits--the normal retirement age (NRA)--depends on the worker's year of birth. For people born before 1938, the NRA was 65. For slightly younger workers, it increases by two months per birth year, reaching 66 for people born in 1943. The NRA remains at 66 for workers born between 1944 and 1954 and then begins to increase in two-month increments again, reaching 67 for workers born in 1960 or later. For workers whose 62nd birthday falls this year, the NRA is 65 years and 10 months.
Workers can begin receiving permanently reduced monthly retirement benefits as early as age 62. People who start collecting retirement benefits at age 62 this year will incur a permanent 24.2 percent reduction in their monthly benefits. As the normal retirement age rises to 67 for future groups of workers, that maximum reduction will also increase. (Once the NRA is 67, the maximum permanent reduction will be 30 percent.) Similarly, workers who delay collecting benefits beyond their normal retirement age receive a delayed-retirement credit to compensate them for the reduction in the length of time they will receive benefits.(18)
The size of the early-retirement reduction for workers is intended to be "actuarially fair"--in the sense that the total value of the reduced monthly benefits that an average worker could expect to receive between age 62 and death is similar to the total value of the full monthly benefits that the worker could expect to receive over that time by waiting until he or she was eligible for full benefits.
More than two-thirds of the workers who began receiving Social Security retirement benefits in the past decade started collecting benefits before the NRA. The majority of those early recipients began collecting benefits at age 62.
Earnings Test. Social Security benefits are reduced if recipients who have not attained the NRA earn more than a certain amount. The rules, known as the retirement earnings test, apply to earnings but not to income from dividends, pensions, or interest. This year, the benefits of Social Security recipients who have not yet reached the NRA will be reduced by $1 for each $2 they earn above $11,640. That earnings threshold automatically rises each year to match the increase in a national index of average wages. Workers whose initial benefits are reduced because of the retirement earnings test will receive higher monthly benefits later.
Maximum Family Benefits. The total amount of benefits that a family can receive on the basis of a worker's earnings record is limited by a family cap (which is generally between 150 percent and 188 percent of the worker's PIA, although family benefits in DI cases are subject to additional limitations). The family maximum generally applies when three or more family members are entitled to benefits.
In general, if their marriage lasted at least 10 years, ex-husbands and ex-wives are entitled to the same benefits based on their former spouse's earnings as they would be if they had remained married. Benefits for former spouses do not count against the family maximum.
Dual Entitlement. If a spouse or widow(er) has worked long enough to earn retired--or disabled--worker benefits on his or her own, Social Security does not pay the full amount of both benefits. Instead, it pays the larger of the two amounts for which the recipient is eligible. Those people who receive their own benefit plus a portion of the other benefit are labeled "dually entitled."
As a rule of thumb, the lower earner of a couple does not receive any spousal benefits if he or she earned at least one-third as much as the spouse earned. However, upon the death of a spouse, the lower earner of a couple generally receives additional benefits based on the earnings record of the deceased spouse. |
