"We can never insure one hundred percent of the population
against one hundred percent of the hazards and vicissitudes of life,
but we have tried to frame a law which will give some measure of
protection to the average citizen and to his family against the
loss of a job and against a poverty-ridden old age."
--President Franklin Roosevelt, when signing the Social Security Act in August, 1935
- What is it and how it works
- Who can collect, and when
- A word about Medicare
- How Social Security benefits are calculated
- Who benefits
- Overpayments and collection of overpayments
- Possible problems in the future
1. What Social Security is and how it works
What most of us think of as “Social Security” is the program to which covered workers and their employers contribute over their work-lives. Over 90% of the country’s workers are covered by the system; most of the others are covered by federal, state or civil service systems. Social Security was not intended as a pension or investment program. It is social insurance - designed to provide a basic level of support during old age or disability.
Social Security provides:
- Retirement benefits for workers and their spouses as
- early as age 62
- Survivor benefits
- Disability benefits for disabled workers and their families,
- Benefits for certain disabled children of retired or deceased workers, and
- Benefits for divorced spouses if married to a worker for at least ten years.
The Federal Insurance Contributions Act (F.I.C.A.), provides the mechanism for collecting employment taxes. An employee and employer are each taxed 6.2% of thye employee's taxable wages, a total of 12.4%. The Medicare tax is 1.45% from each, a total of 2.9%. The overall total of employment taxes is 15.3%.
Social Security and Medicare taxes are collected by employers and paid to the Internal Revenue Service, which pays them over to the Social Security Trustees to pay benefits or distribute among the appropriate Social Security Trust Funds. Funds not needed soon to pay benefits are invested in special issue treasury bonds at market rates.
The Social Security Administration has a large web site at www.ssa.gov (or access it through our web site; go to Links). There is a great deal of useful information on the site, but it can be hard to navigate. One helpful approach is to click on the "site map" to start a search on a particular topic. It is now possible to register for benefits, obtain an earnings statement and estimate of benefits on-line. Every local SS office offers numerous free pamphlets explaining different aspects of the program (many can be downloaded from the web site) or you can call Social Security at 1-800-772-1213 and ask for information to be mailed to you. (This takes patience; the lines are often busy.)
Entitlement to Social Security benefits also entitles the beneficiary to Medicare. Benefit payments vary, of course, but the average monthly retiree benefit in 2009 is $1,152. The maximum is $2,323 (unless increased by waiting until age 70 to draw). The average benefit paid to younger disabled retirees is $1,064. There is unlikely to be a cost of living increase in 2010, so benefit payments will probably stay the same. Single retirees with taxable incomes of $25,000 or more and couples with $32,000 or more are subject to federal income tax on part of their SS income.
Each year the Social Security Trustees summarize the year’s events and make projections and recommendations. Click on “Trustee’s Report” on the web site to read current and past Reports.
2. Who can collect, and when?
The best source of practical information about Social Security benefits is the literature made readily available by Social Security. District offices provide a multitude of readable brochures, and materials can be accessed on the Web and by calling Social Security (1-800-772-1213), but here are some basics:
Qualifying for Retirement Benefits (OASI)
- To qualify for Social Security retirement benefits you must be credited with at least 40 “quarters of coverage”.
- A quarter of coverage is earned by working for a “covered” employer (almost all are covered) and earning a certain minimum amount in a given period.
- Since 1978 workers who earn a certain dollar amount any time within a calendar year earn coverage credits. A worker who earns $1,090 in 2009 will be credited with one quarter of coverage. If she earns $4.360 or more during the year she will be credited with four quarters.
- The dollar amount increases from time to time, and no one can earn more than four quarters’ credit in any one year.
Qualifying for Disability Benefits (SSDI)
For disabled workers the number of quarters required for benefit entitlement may be different. Depending on your age, you may need fewer quarters of coverage to collect benefits, but you must have earned a minimum number of credits, some of which were earned just prior to disability: the "recent work test" and "duration work test").
- Example: An individual disabled at age 48 must have worked for at least six years, including the five years just before the date of disability.
- Workers found to be qualified for SSD, or Social Security Disability, may collect benefits for themselves and for their families.
"Disability" is defined as being so severely impaired, physically or mentally, that you are unable to perform any substantial gainful work that exists anywhere in the economy. Benefits are not payable to anyone unable to work only because of substance addiction.
It can be difficult to establish entitlement to disability benefits. Age can be a factor. A person claiming disability at age 60 might be considered disabled based on the problems similar to those of a 50-year-old whose application is denied. Workers who by any measure of common sense would appear to be disabled may be denied benefits when they first apply. If that is your experience and you feel you are entitled, you should appeal within the time stated. At that point it would be wise to obtain the assistance of an attorney who specializes in Social Security work. The average time for resolving an appeal is two years, but by far the majority of those who appeal are ultimately successful.
Once determined disabled, a beneficiary may do some work but may not exceed $980 a month in substantial gainful activity. A disabled beneficiary who wishes to and is able to do some work should get information about work parameters from SSA or a knowledgeable attorney or advocate.
Social Security Disability Insurance (SSDI) is a completely different program from Supplemental Security Income (SSI). SSDI is based on earnings and tax contributions; SSI is a means-tested program for seriously impaired children and for disabled adults unable to work or to contribute enough to the Social Security program to be eligible for benefits. See more about SSI in the article "Income Assistance" on this web site.
Check Earnings Statements
Social Security sends periodic statements of earnings to workers. You should always check to be sure all earnings are correctly recorded. The process of calculating benefits is briefly outlined below.
When to begin collecting benefits
You can collect as early as age 62, but your benefits will be reduced each month you collect prematurely, and the reduction is permanent. If your Full Retirement Age (FRA) is 66 and you start collecting benefits at age 62 your benefits will be reduced by 25%. Your spouse's benefits will be reduced by 30%. On the other hand, you will have four years of additional benefits. If you are not working it generally takes as much as 15 years for you to begin to "lose" money by collecting early-(assuming you live the anticipated life span.) If you continue working, however, the calculation is more complicated and it is different in each case.
If you wait to start collecting until age 70, your benefits will increase for each month you delay collecting. In any case, eligible spouses may collect one half of a husband’s or wife’s benefit amount.
There may be less incentive to delay retirement since the "work penalty" for earnings of those from Full Retirement Age until age 70 was eliminated in 2000.. Currently a worker may earn up to $37,680 in the year (s)he attains FRA but before reaching that birthday (S)he loses $1.00 for every $3.00 earned after that point. Those who collect Social Security retirement benefits at ages 62 - FRA forfeit $1.00 of every $2.00 over a specified amount ($ $14,160 a year or $ 1,180 a month in 2009).
Eligible spouses may collect one half of a husband or wife's benefit amount. For spouses who have worked themselves, Social Security automatically calculates and pays the most favorable benefit between 100% of the individual’s benefit, and 50% of the spousal benefit.
3. A word about Medicare
There is an article about Medicare on this web site; here are some important points:
Regardless of when you start collecting SS benefits you should register for Medicare “Part A” when you reach 66 (or Full Retirement Age if not 66), even if you are still working and are covered under an employer’s policy. Part A entitlement is automatic when you sign up for Social Security benefits. There is no premium for most workers. Part A helps with hospital bills. Most employer health plans require that eligible employees enroll in Part A. You may want to delay enrolling in Part B in order to avoid the premiums. Be sure your employer's coverage meets Medicare standards.
Medicare Part B helps with medical and other non-hospital bills. You must elect whether or not to take Part B. Most people do and it is hard to think of a reason not to. There is a monthly premium ($96.40 per month in 2009) deducted from the Social Security check. There are programs to help low income recipients with the premiums. The Part B premium is not expected to increase for most beneficiaries in 2010, but about 25% of beneficiaries - those who become eligible in 2010 and those with high incomes -can expect to pay more.
If you do not elect Part B within the three months before your birthday month, during that month, or the three months after it, your monthly premium will be increased when you do make the election under this part, unless you fall within one of the exceptions. In addition, you are not eligible for Part D (prescription drug coverage) unless you are enrolled in Part B.
If you continue working after age 65 and you are covered under an employer’s policy and your employer has more than 20 workers, you may delay electing Part B until seven months after you retire, without having your premium raised. CHECK WITH SOCIAL SECURITY TO BE SURE YOUR SITUATION FITS WITHIN AN EXCEPTION and do not let the time for election slip by when you do retire. If you do so, you may have to wait until the next Open Enrollment Date. Not only will this delay the effective date of your Part B coverage, but you cannot apply for a Prescription Drug Plan unless you are enrolled in Part B.
In most cases disabled workers do not qualify for Medicare coverage until two years from the "date of disability" stated in their benefit approval documents. There are exceptions for those with End Stage Renal Disease (ESRD) and Amyotrophic Lateral Sclerosis (ALS or Lou Gehrig's Disease"). They can collect immediately upon establishing these illnesses.
4. How benefits are calculated
Full retirement age (“FRA”) was set at 65 in 1935, although it was 70 in some other countries. Legislation provided for increases in the FRA by increments. For those born in 1943 - 1954, full retirement age is 66. In 2020 there will be two-month annual until FRA reaches 67 in 2027. .
It is possible to take a reduced benefit starting at age 62, or enlarge benefits by claiming after FRA (up to age 70). The formula for computing benefits is generally based on lifetime earnings. The formula is weighted so low-end workers receive much more than they contribute (adjusted for inflation), while higher-salaried workers who live an average life span will receive more than they paid in, but not in the same proportion as lower-paid workers.
Here are the steps used in calculating benefits:
1. Start with the lifetime earnings statement.
2. Multiply each year’s earnings by the index figures for that year (determined by Social Security). Indexing brings the value of earlier years’ wages into line with today’s wages. Ex. Worker born in 1947 who earned $7,627 in 1974 would multiply that by an index factor of 5.0313, for adjusted wages of $38,256 for that year.
3. Add the adjusted wages from the 35 highest-earnings years. Divide by 420 to get the Average Indexed Monthly Earnings (AIME).
4. Multiply the AIME by the bend points for the year the worker became 62 ( the dollar amounts at which the bend points apply change from year to year):
Work through this complex process yourself by going to
The Primary Insurance Amount (PIA) is the starting point for calculating benefits. If a beneficiary begins collecting benefits at age 62 her monthly benefit will be the PIA less the reduction for early retirement. If she retires at age 66 (with no additional earnings) her benefit would be the PIA plus cost-of-living adjustments for each of the years since her PIA was determined.
Fortunately, the SSA web site now has computerized
calculations that provide these figures without the
individual having to make these complex
steps. It is useful, however, to understand how the
5. Who benefits
One reason for the program’s success is that everyone who works long enough to qualify receives benefits. The greater the lifetime earnings, the greater the Social Security benefit, up to a maximum monthly benefit in 2009 of $ 2,323 ( before any increase from delaying benefits.) On the other hand, the process is weighted so that low-income workers receive a benefit that is higher in proportion to their contributions.
Social Security also pays disability and survivor benefits. For the average wage-earner this aspect of Social Security is equivalent to about a $300,000+ life insurance policy and a $250,000 disability policy. It can also provide benefits to the disabled person and a family. The SSA estimates that a 20-year-old today has a 3 in 10 chance of being disabled before retirement.
Social Security is now sending periodic earnings statements to participants so that if there are mistakes in earnings they can be corrected promptly. These statements provide estimates of disability and retirement earnings under different scenarios (estimated benefits if you were disabled today, if you retired at 62, at 66, etc.).
Our office is seeing an increasing number of “overpayment” cases. These are cases in which a beneficiary has been paid too much, Social Security discovers the error and sends a notice to the beneficiary explaining why the overpayment occurred, and stating that the overpayment will be collected by deducting some percentage of monthly benefits until the total is reimbursed.
Social Security computations are often complex, and it is not surprising that errors occur from time to time, especially considering the vast numbers of beneficiaries involved.
For an individual beneficiary who is depending on that check for all or a substantial part of his or her income, though, such a letter is a terrible blow, and a frightening one.
You can appeal an overpayment but you must act immediately. The overpayment letter will specify a time within which you must act. Do it. If you feel you cannot handle this yourself, call the legal provider for your Area Agency on Aging or your private attorney, but do not delay.
In order for Social Security to decide not to collect the overpayment,
(a) it must not have been your fault, and
(b) you must be unable to repay the money without crippling your ability to pay your living expenses.
Most overpayments do result from a Social Security error, but there are situations in which the beneficiary is at fault, most often cases in which a beneficiary failed to report that (s)he was working and that benefits should be reduced. Sometimes Social Security will take the position that a beneficiary should have caught an overpayment and reported it, rather than accepting it.
Most of the time, though, Social Security made the error, and the only issue is whether the beneficiary can afford to repay the money paid by mistake. It is very important to get every bit of information together, and to be accurate. In our experience most clients greatly under-estimate their monthly expenses, and completely forget items that are paid quarterly, annually or occasionally, but are legitimate expenses. Home and auto insurance are often overlooked.
Your attorney can probably provide a comprehensive list of possible expenses as a guideline to help you make a realistic summary. You will need to gather utility and other bills, bank statements and other evidences of expenses paid for the three past months (and others that are paid intermittently) before you go for your conference. Occasionally the overpayment is so large, and it is so evident that the beneficiary was not at fault and cannot possibly pay it back from the correct monthly benefits, that no waiver conference will be required. Do not assume that will be the case, however.
After receiving and processing your request for reconsideration, a SS worker will make an appointment with you at the office to go over your bills and expenses to determine whether you can afford to repay the excess benefits you received. It is not necessary but may be helpful to have someone accompany you to this conference. Whatever you do, do not simply fail to show up. If you cannot attend on the date set, call and let SS know. Get the name of the person you speak with and follow up with something in writing, stating that person’s name and the time and date you called.
If SS concludes that you can afford to pay, and you believe you cannot, you have the right to appeal and have a hearing before an Administrative Law Judge. At this point you would be wise to seek help from an attorney.
7. Problems in the future
Although the expected large numbers of elderly in the near future will place a strain on the system without some adjustments, Social Security is a great success story. It has, in fact, reduced the amount of poverty among the elderly, disabled workers, and their families. But with the anticipated surge in numbers of the elderly, at some point, changes need to be made in order to pay full planned benefits to tomorrow’s beneficiaries. Social Security is by no means "bankrupt", but unless reforms are instituted in the next few years, by 2037 or thereabouts it will be able to pay only about 3/4 of currently scheduled benefits.
There has been little real debate about this issue; there have only been arguments, often heated. . Commentary is often manipulative or outright untrue. It is critical, however, for voters to be fully informed about all aspects of the Social Security issue. This is a complex problem for which there is no quick or simple fix.
Anticipated surpluses in income over benefits paid declined during the recession. Surpluses are expected to cease in 2016, when benefits paid out begin to exceed taxes paid in, as baby boomers retire and there are fewer workers for each retiree. This was anticipated, which is why trust funds were initiated and why they have been accumulating surpluses. But Trust Funds are currently expected to run out in 2037. At that point funds will be able to pay about 3/4 of scheduled benefits through 2083.
Suggestions have been made from time to time. Unrest in the stock market over the last two years diminished but has not eliminated calls to allow younger workers to divert some of their employment taxes in private accounts. There have been proposals to invest some Social Security funds in the private market. One frequent suggestion is to raise the dollar amount of earnings that are subject to Social Security tax ($106,000 in 2009). The argument is that raising the cap would be in keeping with the upward direction of earnings. Raising the cap by $50,000 would probably help, but not as much as might first appear. When those high-income workers retire, they will have earned more benefits. Other suggestions are to adjust calculations of annual cost-of-living increases, or to slightly reduce benefits over time. There are many other proposals. (See Resources for a list of web sites presenting different views.)
Social Security's financing is not as immediately critical as that of Medicare and Medicaid, but the situation is so politicized that reasonable compromise seems unlikely . Cooler heads counsel that it would be wise to act while relatively minor changes could assure the financial stability of this basically strong program.
The original Social Security Act required only a few pages. It has been amended numerous times, with twenty-one Titles enacted at one time or another. The present Act contains eighteen active Titles, the four most extensive being OASDI, SSI, Medicare and Medicaid, plus another fairly extensive Title on Temporary Assistance to Needy Families(TANF).
OASDI. The statutory basis for federal Old Age, Retirement and Disability Insurance Benefits (OASDI) is 42 U.S.C. §401 et seq., also cited to Title II of the Social Security Act. Thus, the first paragraph of the Act could be cited either as 42 U.S.C. § 401(a) or as Social Security Act § 201(a).
SSI, Medicare and Medicaid. The amendments that introduced Supplemental Security Income are codified at Title XVI of the Act (42 U.S.C. §1382); Medicare is Title XVIII of the Act (42 U.S.C. § 1395); and Medicaid is Title XIX (42 U.S.C. § 1396.)
Alabama Elder Law, H. Lee and J. Taylor, pub. Thomson-West Publishing, updated annually. The chapter on Social Security provides a thorough review of the program.
Elder Law in a Nutshell, by Frolick and Kaplan; pub. West Publishing Company, 2006, updated periodically. Available online and through law school bookstores at modest cost. Somematerial in the 2006 Social Security chapter is outdated, but it provides a good general explanation of the program in condensed form.
Web sites providing a range of views and information on Social Security:
www.aarp.org/money/social_security; AARP, Washington
www.concordcoalition.org; The Concord Coalition, Washington.
www.iwpr.org; Institute for Women’s Policy Research, Washington.
www.mrrc.isr.umich.edu; Michigan Retirement Research Center
www.nasi.org National Academy of Social Insurance, Washington
www.tcf.org The Century Foundation, New York