social security

2012 Bend Points for Social Security Retirement

Nov 4th, 2011

For those of you who aren’t quite up to snuff on the carnage that makes up the Social Security retirement benefit calculation, there are a couple of figures that are important to the calculation process called Bend Points. 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 in calculating the PIA, and they actually bend.

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 for 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 2012 bend points is from 2010.

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. I’m not sure how these first figures were calculated – it’s safe to assume that they are part of an indexing formula set forth at that time. At any rate, now that we know these two numbers, we can jump back to 2010’s AWI Series figure, which is $41,673.83. It all becomes a matter of a formula now:

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

So here is the math for 2012’s bend points:

$41,673.83 / $9779.44 = 4.2614
4.2614 * $180 = $767.05, which is rounded down to $767 – the first bend point
4.2614 * $1,085 = $4,623.59, rounded up to $4,624 – the second bend point

And that’s all there is to it. Hope this helps you understand the bend points a little better.

Fixing Social Security

Oct 14th, 2011

by jblankenship.

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Much has been written about the ills of our Social Security system as it stands today. There has been considerable banter about how the system is a Ponzi scheme (it’s not), how it will go bankrupt soon (it can’t), and how we’ve got to do something about it soon (we do) like abolishing it completely (we can’t).

The above issues have already taken up a lot of cyber-paper, as many other writers have covered them far more completely than I will attempt here.

Briefly, the Ponzi concern is out of the question, as the Social Security system isn’t a savings plan, it’s an insurance plan. And, like all insurance plans since many receivers of benefits have put little if anything into the plan (dependents and survivors of participants, for example), many participants will receive less from the plan than they put into it. The Social Security system was never intended to pay you back what you put into it – it’s a social insurance system, so many pay into it with little return. Like it or not, that’s what we’ve put in place, and that fact is not likely to change.

The bankruptcy question is resolved by the fact that the system always has new money coming into it from tax rolls, which means it cannot be bankrupted. The system could become insolvent, meaning more is going out than is coming in, but since the amounts paid out to new recipients can (and will) be adjusted, this insolvency won’t happen either. Of course this means that the people paying into the system will receive fewer and fewer benefits as time goes on, which leads us to the next point.

We’ve got to do something to repair the system, but abolishing it isn’t the answer – it’s not even among the viable answers. I’ve seen it written elsewhere that we could just shut down the system and give all current participants (those who have paid in) an account equal to the amount that they’ve put in, since there’s a trust fund holding non-marketable bonds already. However, with so many folks relying on the system to provide benefits when they didn’t put anything into it, or didn’t put as much into it as they are receiving in benefits (such as folks on disability), abolishing the system altogether would leave these folks out in the cold.

What may work

Means testing is one of the matters that must be addressed. As it relates to all forms of benefits, presently the only means test results in ordinary income tax on up to 85% of the benefits received. This doesn’t go far enough – being a social insurance program, benefits are guaranteed to all eligible persons, including those who have no need for the funds in any way, such as the über-rich. I’d suggest that the means testing should go even farther than that, to include those not-so-über-rich, with incomes that far encompass the need for this additional social insurance.

Another area to resolve problems with our current system is in the complexity of the way it works and how benefits are paid to people. There is a tremendous amount of bureaucracy involved with administering, responding to questions, and working through complaints with the way the system currently works. If the system were changed to force folks to only file for retirement benefits at Full Retirement Age (FRA) and not before or after, much of this complexity would be removed. Along with the removal of the complexity, much of the bureaucracy could be eliminated, reducing the overhead and costs, making the system more efficient.

By setting one specific age for retirement benefits, we would also have much better control over outflows from the system, and adjusting FRA would have an immediate and calculable impact on the system. Granted, the impact on recipients would also be immediate under this proposal.

Don’t get me wrong, I’m not suggesting that this will fix everything. We’ll have to get the actuaries involved to figure out how much of an impact these changes could have. The end result is probably going to be that current drags on the system will require further reduction in benefits than I’ve proposed and/or additional taxation in order to keep the benefits flowing. But taking a few steps right now can help to forestall the presently inevitable outcome.

If you’re looking for more on how the Social Security system works today, check out my new book – A Social Security Owner’s Manual. The book provides a well-rounded look at how your benefits work – you’re bound to find something you didn’t know.

How Taxation of Social Security Benefits Works

Aug 5th, 2011

by jblankenship.

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You probably are aware that a portion of your Social Security retirement benefit may be taxable. Do you know how the tax is calculated? Or how the taxable portion of your benefit is determined?

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The Rules

There are a couple of different levels of income that determine how much of your Social Security Benefit is taxed. The first level is $32,000 for a married couple filing jointly (MFJ) or $25,000 for single, head of household and qualifying widow(er) filing statuses. If your Modified Adjusted Gross Income (MAGI) plus half of your Social Security benefit is less than this first level for your filing status, none of your Social Security benefit is taxable.

The second level is $44,000 for MFJ or $34,000 for the single filing statuses. If your MAGI plus half of your Social Security benefit is greater than the first level but less than the second level, then as much as 50% of your Social Security benefit may be included in your taxable income.

If your MAGI is above the second level, then as much as 85% of your Social Security benefit may be included in your taxable income.

Like most calculations in the tax code or where Social Security is involved, it’s a mess to understand. I’ll give you some examples below to illustrate how this works.

Examples

Here are a few examples:

Example 1. Married Filing Jointly, MAGI = $15,000; SS = $15,000

1. MAGI	$15,000
2. Half of SS Benefit	$7,500
3. Provisional Income (PI) line 1 plus line 2	$22,500
4. First Level	$32,000
5. Subtract line 4 from 3 – if less than zero, enter zero and stop. No tax on SS Benefit	$0

Since the PI is less than the First Level, none of the SS benefit is taxed.

Example 2. Married Filing Jointly, MAGI = $25,000; SS = $20,000

1. MAGI	$25,000
2. Half of SS Benefit	$10,000
3. Provisional Income (PI) line 1 plus line 2	$35,000
4. First Level	$32,000
5. Subtract line 4 from line 3	$3,000
6. Multiply 50% Level by .5	$1,500
7. Second Level	$44,000
8. Subtract line 7 from line 5 – if less than zero, enter zero and stop. Line 6 is added to your income as taxable	$0

Since the 50% level amount is greater than zero, half of the amount above the 50% level will be added to the taxable income for the couple. None of the benefit is includable at the 85% rate.

Example 3. Married Filing Jointly; MAGI = $45,000; SS = $20,000

1. MAGI	$45,000
2. Half of SS Benefit	$10,000
3. Provisional Income (PI) line 1 plus line 2	$55,000
4. First Level	$32,000
5. Subtract 1st from PI (50% level)	$23,000
6. Multiply 50% Level by .5 – if more than $6,000, enter $6,000	$6,000
7. Second Level	$44,000
8. Subtract line 7 from line 3	$11,000
9. Multiply line 8 by .85	$9,350
10. Add line 6 and line 9	$15,350
11. Multiply line 2 by 1.70	$17,000
12. Lesser of line 10 or line 11 is added to your income as taxable	$15,350

Since the SS benefit was greater than the upper limit, a portion of the benefit is included at the 50% rate, and another portion is included at the 85% rate, for a total addition of $15,350 to taxable income for the couple.

Example 4. Married Filing Jointly; MAGI = $55,000; SS = $20,000

1. MAGI	$55,000
2. Half of SS Benefit	$10,000
3. Provisional Income (PI) line 1 plus line 2	$65,000
4. First Level	$32,000
5. Subtract 1st from PI (50% level)	$33,000
6. Multiply 50% Level by .5 – if more than $6,000, enter $6,000	$6,000
7. Second Level	$44,000
8. Subtract line 7 from line 3	$21,000
9. Multiply line 8 by .85	$17,850
10. Add line 6 and line 9	$23,850
11. Multiply line 2 by 1.70	$17,000
12. Lesser of line 10 or line 11 is added to your income as taxable	$17,000

Since the PI was greater than the 85% level, we did the same type of calculation as in Example 3, except that this time the total of the 50% taxed amount and the 85% taxed amount was greater than 85% of the overall SS benefit, so only that amount is added to the taxable income for the couple.

Hopefully these examples will help you to better understand how the amount of taxable Social Security benefit is calculated for various situations.

How Survivor Benefits are Treated

Jun 10th, 2011

by jblankenship.

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Image by mayakamina via Flickr

Social Security Survivor Benefits are much different from Spousal Benefits in several ways. In fact, there’s very little to compare between the two. Here are the primary things that you need to know about Survivor Benefits:

Survivor Benefits can be claimed as early as age 60. Of course, as with all early claims for benefits, the amount will be reduced if you claim earlier than Full Retirement Age (FRA). At age 60 your Survivor Benefit would be reduced to 71.5% of your late spouse’s benefit amount (or PIA if he or she wasn’t at FRA).
Survivor Benefits are based upon 100% of the amount of benefit (at your FRA) that the deceased spouse was or should be receiving, whereas Spousal Benefits are based upon the PIA, and then only at a 50% maximum rate.
Survivor Benefits can also be applied for separately from your own retirement benefit – meaning that you can receive Survivor Benefits while delaying receipt of your own retirement benefit (if it’s higher) in order to receive Delayed Retirement Credits up to age 70.
Survivor Benefits are only payable if the surviving spouse has not remarried before age 60. After age 60, the surviving spouse can remarry and still receive Survivor Benefits based upon the deceased spouse’s record.
A disabled surviving spouse can collect benefits as early as age 50 – at the same rate as if waiting to age 60 – 71.5% of the deceased spouse’s benefit.
If a surviving spouse is caring for a child under the age of 16, Survivor Benefits can be claimed until the child or children are over age 16. This benefit is equal to 100% of the deceased spouse’s benefit (or PIA if the deceased spouse was not receiving benefits).
Survivor Benefits can also be paid to children of the decedent, provided they are under age 19 and a full time student. If the child is disabled (prior to age 22), Survivor Benefits can still be paid to the child after age 19. The child’s Survivor Benefit is at a 75% rate of the decedent’s benefit.

These Survivor Benefit rules also apply to ex-spouses who become widows or widowers, as long as the ex-spouse was married to the ex-spouse for at least ten years.

A File and Suspend Review

May 20th, 2011

by jblankenship.

3 comments

I get a lot (a LOT) of questions about the File and Suspend tactic for Social Security benefits, so I thought some more review would help. For the uninitiated, File and Suspend is a tactic that married couples can use to help maximize their total Social Security benefits. In this post I’ll try to cover some of the more common questions.

File and Suspend works like this: One of the two in the couple can file an application for Social Security benefits and then immediately suspend in order to not receive the benefits. This can allow the other spouse to utilize the first spouse’s record to receive a Spousal Benefit. Other eligible dependents (such as children under 18) can also receive benefits based upon the filed and suspended record.

Image via Wikipedia

There are a few factors to note about File and Suspend:

You must be at least at Full Retirement Age (FRA) to File and Suspend.
Either spouse can File and Suspend, but not both. By Suspending, you are not eligible to receive a Spousal Benefit.
If the non-Suspending spouse is under FRA and begins receiving Spousal Benefits, he or she will no longer be earning Delayed Retirement Credits (DRCs) on his or her own record. Plus both the Spousal Benefit and the “own” benefit of the non-suspending spouse will be permanently reduced by filing before FRA.
The spouse that has not Filed and Suspended can receive Spousal Benefits based on the other spouse’s record at any age over 62 – but the amount of the benefit will be reduced if the spouse receiving Spousal Benefits is less than FRA. At FRA, the Spousal Benefit would be 50% of the filed and suspended worker’s Primary Insurance Amount.

Why File and Suspend?

The main reason for File and Suspend is to allow the Suspending spouse to delay receiving benefits, earning up to 8% in Delayed Retirement Credits (DRCs) per year. This will not only increase the amount of benefit that the Suspending spouse will receive when he or she files for benefits, but it will also increase the amount of Survivor Benefits for the other spouse. At the same time, the other spouse can be receiving Spousal Benefits based on the first spouse’s record.

Here’s an example: The husband has a PIA amount of $2,300, and his wife has a PIA amount of $1,500. The couple are both at FRA. The husband Files and Suspends, and the wife can immediately begin collecting a Spousal Benefit equal to 50% of the husband’s PIA – $1,150. At the same time, both spouses are accruing DRCs on each of their own records. Both of them can delay filing for benefits on his and her own record until age 70, at which point they will each have achieved the maximum benefit on their own records. When she reaches age 70, the wife will file for her own benefit and discontinue receiving the Spousal Benefit. The husband will also re-file at age 70.

Another example: The wife has a PIA amount of $2,000, and the husband has a PIA of $1,000. The wife is at FRA, and the husband is a year younger. When the husband reaches FRA, the wife could File and Suspend, and the husband can begin receiving a Spousal Benefit of 50% of the wife’s PIA, delaying filing for his own benefit in order to receive the DRCs.

The husband in the second example could choose to begin receiving Spousal Benefits before FRA. In that case though, he would not be eligible for DRCs. This is due to the rule that requires a “deemed filing” if you file for Spousal Benefits prior to FRA. A deemed filing is the same has having filed for your own benefit, and as such your benefit and the Spousal Benefit will be reduced, permanently, due to the early filing.

A third example: The husband has a PIA of $2,000 and the wife has a PIA of $500. The husband is two years younger than the wife, she is 66 (FRA) and he is 64. The wife has begun receiving her own benefit at FRA. Since the husband is not yet at FRA, File and Suspend is not available to him. However, once he reaches FRA, he can File and Suspend, and the wife can begin collecting a Spousal Benefit, increasing her own benefit to 50% of his PIA.

It’s important to note that for all of the examples, the spouse that is described as having Filed and Suspended could just as easily filed for his or her own benefit and begun receiving it immediately, rather than suspending. This would also enable the other spouse to begin receiving Spousal Benefits. The spouse that is collecting benefits on his or her own record would just no longer be accruing DRCs for his or her future benefit.

The Protective Filing Statement

May 13th, 2011

by jblankenship.

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When planning for your Social Security benefit, there is an additional tactic that you may never have heard of: the Protective Filing Statement. This statement is a way to apply for benefits without actually applying.

Huh?

At any time after you reach age 62, you can file the Protective Filing Statement (PFS) which will “protect” the date of acceptance as your application date, whenever you choose to apply in the future. And when you do apply, the PFS date will be considered your filing date – and you’ll get retroactive benefits back to that date.

Image via Wikipedia

After the PFS is filed, the SSA will issue a notice indicating that you must file within six months. This doesn’t mean that you have to file within six months, it just means that, in order to retroactively file as of your protected date, your actual application must have been filed no later than six months after the protected date.

How does this work in practice? Let say that you reach age 62 in February this year. You’re actually eligible for benefits in March, since you weren’t 62 for the entire month of February… so you file a PFS in March. You’re not ready to collect benefits, but you want to protect your date. Then in July your company “reorganizes” (we all know that really just means layoffs). Instead of seeking other work, you decide to just go ahead and retire. When you file your application for Social Security benefits in August, your actual filing date can be retroactive to March, since you filed a PFS.

If your income for the year was low enough, you might go ahead and take the retroactive benefits – but the key here is that without the PFS you would forego those benefits altogether. It’s for this purpose that it makes sense to file a PFS from time to time if you’re delaying receipt of benefits sometime after age 62.

How to do it

There’s nothing magical about the PFS – it’s simply a statement you’ve made to the SSA indicating that you’re intending to file at some point in the future. You don’t have to set a date, you just need to indicate that you’re intending to file. Here are the requirements:

Must be in writing
Must indicate an intention to claim in the future
Must be signed by the applicant
Must be submitted to your local district office

And that’s it. A few words of caution are in order: Keep a date-stamped copy of your PFS. If you hand-deliver the statement (recommended) to the district office, ask the representative to photocopy the statement and date-stamp your copy. Occasionally these get lost, and without a copy of your statement, it will be impossible to prove that you submitted it.

If mailing the statement, make a copy beforehand, and then send the statement by registered or certified mail. This way you’ll have evidence of delivery.

It’s also important to note the six month limit for the PFS. After six months has passed, the PFS is no longer in effect, and if you apply at that stage, unless you’ve file a subsequent PFS, the date of your application is your filing date, with no retroactivity.

Tax Bill Higher Than You Expected?

Apr 18th, 2011

by jblankenship.

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Now that you’ve (hopefully) filed your return for 2010, you may have noticed that the bill was higher than you expected. This may be due to some subtle changes to the tax law that affected your return for this year. Listed below are some of the changes that you may have been impacted by:

Social Security taxation: Especially if you had unusual income taxed in 2010, such as a Roth Conversion, you could be subject to as much as 85% taxation of your Social Security benefit.

Alternative Minimum Tax: If you’ve been impacted by this, not only are your ordinary income tax items taxed at a higher rate, but your capital gains and dividends could be taxed at a rate higher than 15% as well. This happens for folks with incomes between $150,000 and $439,800 (or $112,500 and $302,300 for singles) as the AMT exemption phaseout occurs.

Primary School in "open air", in Bucharest

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Child Tax Credit: If your income is over $110,000 ($75,000 if filing Single), the Child Tax Credit reduces by $50 for each $1,000 over that limit. This has the effect of increasing the marginal tax rate by 5% for each child, as your income increases.

Passive Loss phaseout for rental realty: If your AGI is greater than $100,000, the deduction of up to $25,000 of losses from rental real estate is phased out up to an AGI of $150,000 when the deduction is eliminated altogether. This can increase the marginal tax rate by 50% ($25,000 credit eliminated as your income increases by $50,000).

There may be other reasons that impact your tax bill, but these are some that have recently come to light as typically occurring.

Average Lifetime Earnings	FRA Social Security Benefit	Replacement Rate
$16,700	$9,400	54%
$37,200	$15,570	40%
$58,900	$20,610	34%
$87,800	$24,000	28%

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