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File and Suspend in the Crosshairs?

Image courtesy of chanpipat at FreeDigitalPhotos.net

Image courtesy of chanpipat at FreeDigitalPhotos.net

Apparently in the President’s recent budget documentation there is a brief mention of a desire to curtail the availability of File and Suspend as an option for Social Security benefit filing.

The reason, it appears, is that the Obama administration views this option as one used only by high income folks to take advantage of the government with this valuable option.

The problem with that viewpoint is that it is used by folks of all income levels, and in fact if it is taken away this could cause some big problems for folks who can least afford to lose benefits. As if anyone can afford to lose benefits, right?

Here’s what happens with File and Suspend: a Social Security benefit recipient has a spouse and/or children that would be eligible for benefits based on his or her record when he or she files for benefits.  If he or she happens to be at or older than Full Retirement Age (FRA, age 66 for folks born before 1955, up to age 67 for folks born in 1960), he or she can file and immediately suspend his or her own benefits, allowing his or her spouse or young children to receive benefits immediately.  By suspending his or her own benefit, he or she will earn delayed retirement credits of 8% per year, which will later provide him or her with an enhanced retirement benefit.

This is exactly the same outcome for the spouse and dependents that would play out if the benefit recipient was to file and *not* suspend benefits – and actuarially the end result should be the same for the primary benefit recipient as well.  Where use of File and Suspend makes a big difference is much later.  In the event of the recipient’s untimely early death, the spouse will receive a much enhanced survivor benefit.  And if the recipient lives a long, healthy life, he or she will enjoy the enhanced benefit as well.

I can’t see where this is an issue of higher income versus lower income, as has been reported.  I believe that the File and Suspend option is being unfairly vilified without complete understanding. The fact that folks with higher incomes have been more likely to choose File and Suspend as an option shouldn’t be cause to eliminate the option for everyone.  As I mentioned, actuarially this should have little or no effect.

The likely reason that higher income folks have been more likely to choose this option is because higher income folks are more likely to seek guidance when filing for Social Security benefits – but again, the word is getting out about this option and more folks are choosing it (once they talk the SSA folks into understanding it!).

As well, often folks with lower incomes and future Social Security benefits may not be in a position to delay receipt of benefits, making File and Suspend a good idea but not viable.

I hope that this gets dropped.  Doing away with File and Suspend will have no beneficial impact on the future viability of the Social Security system, in my opinion.  All this is likely to do is make a lot of software developers rewrite their software to remove this option.  If looking for provisions to remove in order to make the system a bit more cost-effective, perhaps the restricted application should be considered.  This one may actually cost the system a bit extra, but so few people even know about it that it’s unlikely.

The real answer is to either re-do the overall calculations, put in place more effective means testing, and/or change the tax structure, perhaps to include all earned income instead of the capped income as the system works now.  Until we face these factors and make real changes, we’re likely to continue on the path to unsustainability within the Social Security system.

Your Social Security Benefits: Are They Taxable?

Image courtesy of Salvatore Vuono at FreeDigitalPhotos.net

Image courtesy of Salvatore Vuono at FreeDigitalPhotos.net

If you’re receiving Social Security benefits, either for disability, retirement, or survivor’s benefits, when you file your tax return you will need to figure out if the benefits you’ve received during the prior year are taxable to you.

You’ll receive a Form SSA-1099 from Social Security sometime in the first months of the year, showing what your benefits were in the prior year, as well as any deductions that were made throughout the year – including Medicare premiums (Part B and/or Part D) if applicable, and federal income taxes withheld.

But are the benefits taxable to you?  At most, 85% of your benefit might be taxed – and it’s possible that none of your benefit is taxable, all dependent upon your total income for the year.  See this article for a detailed explanation of How Taxation of Social Security Benefits Works.  The IRS recently published their Tax Tip 2014-23, which details some facts about taxability of Social Security benefits.  The actual text of the Tip is below:

Are Your Social Security Benefits Taxable?

Some people must pay taxes on part of their Social Security benefits.  Others find that their benefits aren’t taxable.  If you get Social Security, the IRS can help you determine if some of your benefits are taxable.

Here are seven tips about how Social Security affects your taxes:

  1. If you received these benefits in 2013, you should have received a Form SSA-1099, Social Security Benefit Statement, showing the amount.
  2. If Social Security was your only sources of income in 2013, your benefits may not be taxable.  You also may not need to file a federal income tax return.
  3. If you get income from other sources, then you may have to pay taxes on some of your benefits.
  4. Your income and filing status affect whether you must pay taxes on your Social Security.
  5. The best, and free, way to find out if your benefits are taxable is to use IRS Free File to prepare and e-file your tax return.  If you made $58,000 or less, you can use Free File tax software.  the software will figure the taxable benefits for you.  If your income was more than $58,000 and you feel comfortable doing your own taxes, use Free File Fillable Forms.  Free File is available only at www.IRS.gov/freefile.
  6. If you file a paper return, visit www.IRS.gov and use the Interactive Tax Assistant tool to see if any of your benefits are taxable.
  7. A quick way to find out if any of your benefits may be taxable is to add one-half of your Social Security benefits to all your other income, including any tax-exempt interest.  Next, compare this total to the base amounts below.  If your total is more than the base amount for your filing status, then some of your benefits may be taxable.  The three base amounts are:
    • $25,000 – for single, head of household, qualifying widow(er) with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year.
    • $32,000 – for married couples filing jointly
    • $0 – for married persons filing separately who lived together at any time during the year.

For more on this topic visit www.IRS.gov.

The Unmarried Penalty With Social Security (and the Divorce Advantage)

Okay, penalty probably is the wrong term for it – maybe the better term would be short-change.

You’ve undoubtedly heard of the marriage penalty for income taxes – this is where it can be beneficial tax-wise for two people to remain single than to be married and be forced to file either jointly or separately.  The tax code contains several ways that this is true.  But did you know that there is a way that married folks might level the field versus singles in the Social Security law-scape?  Plus, divorced folks may also have an advantage over singles AND married folks who were never divorced (or who divorced after marriage of less than ten years)?

The Marriage Advantage

When a worker remains single over his or her working life, there is an inequality in benefits paid out based on his or her record when you compare it to that of a married person.  Here’s what happens:

Let’s say Dave and Eddie are the same age, with the same earnings record over their lifetimes (in fact they worked side-by-side for most of their careers).  Dave has been single his whole life, but Eddie married Valerie 30 years ago and they remain married.  Both Dave and Eddie are 66 this year, and they both file for their Social Security benefits, at a rate of $2,000 per month.

At the same time, Valerie didn’t work very much outside the home (not enough to be eligible for Social Security benefits on her own record – she only worked one day at a time). However, since she’s also 66 this year, she can file for a spousal benefit based on Eddie’s Social Security record, in the amount of 50% of Eddie’s age 66 benefit, or $1,000.

So, for the exact same amount paid into the Social Security system over the years, Eddie’s earnings have generated benefits 50% greater than Dave’s.

And it doesn’t stop there – if Dave and Eddie both live to age 80, but then Valerie lives another five years after Eddie’s death, she will receive a survivor benefit equal to Eddie’s benefit for those additional five years.  There is no survivor benefit paid on Dave’s record since he was never married.

The Un-Divorced Penalty

When a worker is married for more than 10 years, gets divorced and then remarries, each spouse that he is either currently married to or was married to for more than ten years is eligible for spousal benefits based upon the worker’s record.  In this way, the Social Security record of someone who has been married more than once (if the marriage(s) lasted at least 10 years before divorce) will bear even more fruit than the record of Eddie above and definitely more than Dave.  For example:

Tom was married to Jane for 22 years and then they divorced.  Not long after, he married Dana and remains married to her to this day.  Jane never remarried, and she never worked outside the home – and neither did Dana.  All three, Tom, Jane and Dana are 66 this year.  Tom decides to file for his own Social Security retirement benefits at $2,000 per month, and Dana files for the spousal benefit based on Tom’s record, for $1,000 per month.  Jane also decides to file for Spousal Benefits based on Tom’s record as well (Jane didn’t remarry after her divorce from Tom), and her benefit is $1,000 per month as well (50% of Tom’s age 66 benefit).

So, with the exact same earnings record as Dave and Eddie (from our first example), benefits paid on Tom’s record amount to $4,000 per month – double the benefits paid on Dave’s record, and 33% more than the benefits paid on Eddie’s record.

The Inequity of Spousal Social Security Benefits

Cover of "Sid and Nancy: The Criterion Co...

Cover of Sid and Nancy: The Criterion Collection

We’ve covered a lot of ground talking about Spousal Benefits and strategies for filing, and other facts to know about Spousal Benefits.  But did you realize that there is a flaw in the process that shortchanges some couples when it comes to Spousal Benefits?

Here’s a pair of example couples to illustrate the inequity:

The first couple: Jane has worked her entire life and has earned a Social Security benefit of $2,600 per month when she retires.  Her husband Sam has been a struggling artist his whole life, as well as a stay-at-home Dad to their three kids when they were young.  As a result, Sam has never generated enough income on his own to receive the requisite 40 quarter-credits to have a Social Security benefit of his own.

The second couple: Sid and Nancy have both worked and had earnings within the Social Security system over their lifetimes.  Sid had a higher level of earnings, generating a Social Security retirement benefit of $2,600 when he’s ready to retire.  Nancy operated a home-based business part-time while the kids were young, and worked outside the home for several years after they were all finished with high school.  As a result, Nancy has a retirement benefit of $1,000 built up for when she’s ready to retire.

The result is this: Both couples, if they file at Full Retirement Age (FRA), will be eligible for the exact same benefit amounts. For the sake of my illustration and to keep things simple, all four individuals reach FRA at the same time.

Jane files for her own retirement benefit of $2,600.  Sam, without an earnings record, can now file for the Spousal Benefit in the amount of $1,300.  Altogether they will receive $3,900 per month.

Sid also files for his own retirement benefit of $2,600.  Nancy then files for her own benefit of $1,000, and since she’s eligible to file for the Spousal Benefit, she will receive a Spousal Benefit offset amount of $300 – bringing her total benefit to $1,300.  Altogether they will receive $3,900 per month.

Exactly the same benefit amount.  Nancy receives nothing extra from Social Security for her earnings record.

One Difference

There is one difference in the options available to these two couples.  Having read my columns on the subject, Sid and Nancy decide that Nancy should file a restricted application for Spousal Benefits only, which would result in the same $1,300 per month benefit.  Nancy can then later, at age 70, file for her own benefit which has been increased due to Delayed Retirement Credits.  This amounts to a 32% increase, which would bring her total benefit to $1,320 per month at that time.

So for her work record, Nancy can increase her overall benefit by $240 per year.  Doesn’t seem fair, does it?  Don’t get me wrong, I don’t think a stay-at-home parent should be penalized and receive nothing for his or her time in that critical occupation, nor do I think that spouses with low or no income should suffer either.  But it does seem that there should be *some* additional benefit for the lower-earning spouse who has generated a benefit on his or her own record.

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Social Security and the Non-Citizen Spouse

Citizenship ceremony, 1960

Citizenship ceremony, 1960 (Photo credit: Oregon Nikkei Legacy Center)

With our increasingly global society today, many married couples are made up of a US citizen and a non-citizen.  In some cases, the non-citizen spouse has never been covered by the US Social Security system – he or she may have been covered by another system in his or her home country.  In other cases, the non-citizen spouse may have worked in a Social Security-covered job while living in the US, and so may have generated a Social Security earnings record of his or her own.

At any rate, it is important to know that your lawful spouse who is a non-citizen may be eligible for Social Security benefits based on your earnings.

As long as other qualifications are met (length of marriage, age of the spouse, and your filing status with Social Security), your non-citizen spouse may qualify for Spousal Benefits based upon your record.  By the same token, your non-citizen spouse will also be eligible for Survivor Benefits upon your passing, as long as all other qualifications are met.

The good news is that if the non-citizen spouse is receiving a pension from another system (such as in his or her home country), this will not trigger GPO (Government Pension Offset) treatment of the Spousal or Survivor Benefits.  These foreign pensions only trigger WEP (Windfall Elimination Provision) impact, and then only to the individual receiving the pension’s own retirement benefit, not the Spousal or Survivor Benefit.

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Survivor Benefits Do Not Affect Your Own Benefits (and vice versa)

I'm a Survivor

I’m a Survivor (Photo credit: FotoRita [Allstar maniac])

I’ve had a few questions about this topic over the past several weeks, so I thought I’d run through a few examples and explain it.

When you have access to a Social Security Survivor Benefit and a Social Security retirement benefit, you can maximize your lifetime benefits by coordinating the two and planning out your strategy for taking each benefit.

As we’ve covered in other articles, it often is best to delay receiving your own benefit as long as possible.  This is because you will receive Delayed Retirement Credits (DRCs) for every month after you’ve reached your Full Retirement Age (FRA, which is age 66 if you were born between 1943 and 1954, and increasing gradually up to age 67 if you were born in 1955 or later).  This DRC amounts to 8% per year, or 2/3% per month.

In addition, it can be beneficial to delay receiving a Survivor benefit past the earliest age it is available (age 60, or age 50 if permanently disabled) as this benefit can be reduced to as little as 71.5% of it’s potential amount if started early.

Plus - this is the really important point to note - neither benefit has an impact on the other.  I’ll illustrate this below in a couple of examples.

Survivor Benefit is Less Than Own Benefit

John, age 60, just lost his wife Priscilla at her age 66.  Priscilla had just started receiving her Social Security benefit in the amount of $1,000 per month.  John has a PIA of $2,000 per month available to him – meaning he will receive $2,000 at his FRA, age 66.  He could also begin receiving his own benefit at age 62, in the amount of $1,500 due to the early start reduction.

Since John is age 60, he is also eligible to receive a Survivor Benefit based upon Priscilla’s record.  John could receive $715 per month in Survivor benefits beginning right now, and continue to receive this amount until he decides to draw benefits based on his own record.  So this means John could receive this amount for 6 years, and then file for his own benefit at the $2,000 per month level.  He could also receive the Survivor Benefit for up to 10 years, and then file for his own benefit at the DRC-enhanced amount of $2,640.

It’s important to note that John isn’t required to begin receiving the Survivor Benefit at age 60, he could delay to age 62 (for example) and then the benefit would be approximately $810 per month.  If he waits until he is age 66, the Survivor Benefit would be $1,000.

Survivor Benefit is Greater Than Own Benefit

Lucy, age 58, just lost her husband David, who was 65.  David had not begun to receive his Social Security benefits as of his date of death.  Had he lived to age 66 (his FRA) he would have been eligible for a benefit of $1,800 per month.  Lucy is due to receive a benefit of $1,500 per month at her age 66.

When Lucy reaches age 60 she has a choice: if she files for the Survivor Benefit, it will be reduced to $1,287 per month.  She could receive this amount until she decides to file for her own benefit ($1,500) at a later date.  On the other hand, if she waits until she is age 62, she could receive her own benefit in the amount of approximately $1,113, due to the reduction factors.  She could receive that amount until she reaches age 66, at which point she could begin receiving the Survivor Benefit at the maximum rate, or $1,800.

Going back to the first hand, Lucy could file for the Survivor Benefit right away at age 60, receiving $1,287 per month, and then wait to age 70 to file for her own benefit.  This would give her the maximum benefit based on her own record, of $1,960, greater than the maximized benefit from David’s record.  If she has the resources, she could wait until age 66 and file for the Survivor Benefit at the $1,800 rate and then at age 70 file for her own benefit at $1,960.

Because taking one type of benefit or the other has no impact on the other benefit, she can choose which strategy works best for her own situation.

Hope this helps to clear up some of the confusion around these benefits.

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Social Security Spousal Benefits versus Survivor Benefits

fra la luce

fra la luce (Photo credit: * RICCIO)

I’ve written a lot about Social Security Spousal Benefits and Survivor Benefits on these pages, but oftentimes there is confusion about how they are applied.  There are things about them that are common, but for the most part there are some real differences that you need to understand as you make decisions about applying for one or the other of these benefits.

For one thing – Survivor Benefits and Spousal Benefits are benefits that you may be entitled to that are based on someone else’s record: your spouse (or ex-spouse) to be exact.  No matter what your own Social Security benefit might be, you have access to the Spousal Benefit and Survivor Benefit, if, of course, you have or had a spouse with a Social Security retirement benefit available on his or her record.

In addition, it is important to note that Spousal Benefits and Survivor Benefits are mutually exclusive.  You can’t receive both at the same time – and if you apply for both at the same time, you’ll end up with the higher of the two.  Technically you wouldn’t apply for both at the same time, you’d just find out which one provides the best benefit for you.  This doesn’t mean that you have to take the higher benefit, because it’s possible that you could receive a better benefit later if you delay filing for one or the other until later.  If you are at least at Full Retirement Age (FRA, age 66 if born in 1954 or before, increasing to age 67 if born in 1960 or later), more than likely the Survivor Benefit is the greater of the two, and neither benefit will increase after you’ve reached FRA, so you might as well receive that benefit at this point.

Both the Spousal and Survivor benefit can be reduced by WEP.  They both can also be reduced or eliminated by the GPO.

Differences

One of the first differences between Spousal and Survivor benefits is the relation to your own retirement benefit.  If you have your own retirement benefit and you haven’t filed for it, filing for the Spousal Benefit before FRA will force a filing for your own retirement benefit, and it could wipe out the Spousal Benefit for you.  If you’re at or older than FRA, you can file solely for the Spousal Benefit and have no impact on your own retirement benefit.

At the same time, if you’re eligible for a Survivor Benefit, you can file for it at any time and have no impact on your future retirement benefit (or Spousal Benefit, for that matter).

So – for example, Phil’s wife Joan died this year.  Joan was 65 years old, and had not started receiving Social Security benefits.  Phil has a Social Security retirement benefit available to him when he decides to file for it.  Phil is 65 years old, and his available benefits look like this:

His own retirement benefit will be $2,000 when he reaches FRA next year.

His Spousal Benefit based on Joan’s record could be $900 at FRA, since Joan was due a benefit of $1,800 at FRA had she reached that age.

Phil’s Survivor Benefit based on Joan’s record could be $1,800 at FRA.

If Phil filed for the Survivor Benefit now, at age 65, he could receive a monthly benefit that is reduced 4.7% from Joan’s FRA benefit, or $1,715.40.  This way he could delay receiving his own benefit until at least FRA – possibly even as late as age 70.  He could also wait until next year (his FRA) and file for the full Survivor Benefit of $1,800, again delaying his own benefit until later.

Any other set of choices would result in a lower benefit for Phil.  It’s possible that he could file for his own benefit right now, at age 65.  This would result in a lowered retirement benefit for him for the rest of his life – and since the Survivor Benefit is less than his own benefit, it wouldn’t make sense to ever file for the Survivor Benefit.  Also available is the option for Phil to not file for any benefits at all this year, and then at FRA he could file a restricted application for the Spousal Benefit alone.  This would result in a $900 monthly benefit – half of Joan’s age 66 benefit.  But since the Survivor benefit will not increase beyond Phil’s age 66, he might as well file for the Survivor Benefit at that point, since it’s double the Spousal Benefit.  As mentioned above, he can still file for his own benefit later, even though he’s collected the Survivor Benefit.

If we reverse the circumstances and Joan is the survivor, here are the benefits available to her:

Her own benefit at FRA is $1,800.

The Spousal Benefit based on Phil’s record could be $1,000 at Joan’s age 66.

The Survivor Benefit based on Phil’s record would be $2,000 at Joan’s age 66.

So Joan has the following options available to her right now, at age 65: she could file for her own benefit now and collect a reduced benefit of approximately $1,680 a month.  She could then file for the Survivor Benefit at FRA, and receive a benefit of $2,000 a month.

On the other hand, Joan could file for the Survivor Benefit now, at age 65 and receive a reduced monthly benefit of $1,906.  She could then wait until she reaches age 70 and file for her own benefit, which would have grown to $2,376 due to the Delay Credits.

The third option for Joan is to do nothing at this point.  She could then file for the Survivor Benefit at FRA, receiving a monthly benefit of $2,000, and then wait to file her own benefit later as detailed above.  If she’s waited to FRA to file, any other option would result in a lower benefit for her – if she filed for her own benefit at FRA, she’d only receive $1,800.  She might as well file for the Survivor Benefit at this point and receive $2,000.  This would then leave open the option to file for her own benefit at the delayed, increased amount as mentioned above.

In both cases, the Spousal Benefit doesn’t come into play, since the available Spousal Benefit for both Phil and Joan is less than the other available benefits.

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Social Security Bend Points for 2014

"The Bend"

“The Bend” (Photo credit: Wikipedia)

When the Social Security Administration announced the Cost of Living Adjustment (COLA) for 2014, this also allowed for calculation of the bend points for 2014.

Bend points are the portions of your average income (Average Indexed Monthly Earnings – AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series.  They’re called bend points because they represent points on a graph of your AIME graphed by inclusion in calculating the PIA.

If you’re interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA.  Here, however, we’ll go over how Bend Points are calculated each year.  To understand this calculation, you need to go back to 1979, the year of the Three Mile Island disaster, the introduction of the compact disc and the Iranian hostage crisis.  According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 – AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2014 bend points is from 2012.

With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085.  Now that we know these two numbers, we can jump back to 2012’s AWI Series figure, which is $44,321.67.  It all becomes a matter of a formula now:

Current year’s AWI Series divided by 1977’s AWI figure, times the bend points for 1979 equals your current year bend points

So here is the math for 2014’s bend points:

$44,321.67 / $9,779.44 = 4.5321

4.5321 * $180 = $815.78, which is rounded up to $816 – this is the first bend point

4.5321 * $1,085 = $4,917.32, rounded down to $4,917 – this is the second bend point

These bend points are then used to calculate your Primary Insurance Amount, or PIA.  With your Average Indexed Monthly Earnings (AIME) figure, we take the first $816 and multiply by 90%.  The amount between $816 and $4,917 is then multiplied by 32%.  Any amount above $4,917 is multiplied by 15%.  These figures are then added together, and the result is your PIA.

Now that we have the bend points, we also know what the maximum reduction for Windfall Elimination Provision (WEP) will be for 2014: it’s equal to 50% of the first bend point.  So, if you’re subject to WEP reduction of your benefits, the maximum amount that your benefit can be reduced for 2014 is $408 – half of the first bend point.

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Social Security Figures Increase for 2014

English: Cardpunch operations at U.S. Social S...

This is a picture of a few of the hundreds of cardpunch operators SSA employed throughout the late 1930s and into the 1950s to maintain Social Security records in the days before the advent of computers.(Photo credit: Wikipedia)

Recently the Social Security Administration released the updated figures for 2014, including the wage base, earnings limits, and the increase to benefits.

For 2014, the wage base for Social Security will rise to $117,000.  This is the maximum amount of W2 wages that are subject to the 6.2% employer- and employee-paid Social Security tax.  This amount represents an increase of $3,300 over the wage base of $113,700 in 2013.

In addition to that increase, benefits to eligible recipients of Social Security retirement will increase by 1.5% in 2014.  This is slightly less than the 1.7% increase to benefits in 2013.  This brings the average monthly benefit for all retired workers up by $19, to$1,294 in 2014.  For the average couple who are both receiving Social Security benefits, the COLA increase is $31 per month, for an average benefit of $2,111 in 2014.

Likewise, there was an increase announced to the earnings limits for Social Security benefits.  When receiving Social Security benefits at during ages 62 through 65, you are allowed to earn up to $15,480 in 2014 before having to forfeit a portion of those Social Security benefits. This is an increase of $360 over the limit of $15,120 for 2013.  For every $2 over the earnings limit, the beneficiary forfeits $1 of Social Security benefits.

In the year that the beneficiary will reach age 66 (but before his or her 66th birthday) the earnings limit for 2014 is increased to $41,400 (up from $40,080 in 2013).  For every $3 earned above that limit, $1 is withheld from your benefits until you reach age 66.  After age 66 there is no earnings limit.

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