Social Security Primer Dawn Nuschler Specialist in Income Security April 30, 2012 The House Ways and Means Committee is making available this version of this Congressional Research Service (CRS) report, with the cover date shown, for inclusion in its 2012 Green Book website. CRS works exclusively for the United States Congress, providing policy and legal analysis to Committees and Members of both the House and Senate, regardless of party affiliation. Congressional Research Service R42035 CRS Report for Congress Prepared for Members and Committees of Congress Social Security Primer Summary The Social Security program began in the 1930s and has been modified by Congress many times over the past seven decades. Today, Social Security provides monthly cash benefits to retired or disabled workers and their family members, and to the family members of deceased workers. Among the beneficiary population, approximately 80% are retired or disabled workers, and 20% are the family members of retired, disabled, and deceased workers. In January 2012, 55.6 million Social Security beneficiaries received a total of $62 billion in benefit payments for the month. Workers become eligible for Social Security benefits for themselves and their family members by working in Social Security-covered employment. An estimated 94% of workers in paid employment or self-employment are covered, and their earnings are subject to the Social Security payroll tax. In 2012, under a temporary 2 percentage point reduction in the payroll tax rate for workers currently in effect, workers pay 4.2% and employers pay 6.2% of covered earnings up to the annual limit on taxable earnings ($110,100 in 2012). To be eligible for a Social Security retired-worker benefit, a person generally needs at least 40 earnings credits, or 10 years of Social Security-covered employment (among other requirements). Fewer earnings credits are needed for a disabled-worker benefit, depending on the worker’s age. A worker’s initial monthly benefit is based on his or her career-average earnings in covered employment. Social Security retired-worker benefits are first payable at the age of 62, subject to a permanent reduction for early retirement. Full (or unreduced) retirement benefits are first payable at the full retirement age (FRA), which is increasing gradually from 65 to 67 under a law enacted by Congress in 1983. The FRA will reach 67 for persons born in 1960 or later (i.e., persons who become eligible for retirement benefits at the age of 62 in 2022). In addition to payroll taxes, Social Security is financed by federal income taxes that some beneficiaries pay on a portion of their benefits and by interest income that is earned on the Treasury securities held by the Social Security trust funds. In 2010, the Social Security trust funds had receipts totaling $781 billion, expenditures totaling $713 billion, and accumulated assets (in the form of Treasury securities) totaling $2.6 trillion. Projections by the Social Security Board of Trustees show that, based on the program’s current financing and benefit structure, benefits scheduled under current law can be paid in full and on time until 2033. The projections also show that Social Security expenditures will exceed income by 19% on average over the next 75 years. Restoring long-range trust fund solvency, and other policy objectives, have made Social Security reform an issue of ongoing congressional interest and debate. This report is designed to provide an overview of Social Security funding and benefits under current law. Specifically, the report covers the origins and a brief history of the program; Social Security financing and the status of the trust funds; how Social Security benefits are computed; the types of Social Security benefits available to workers and their family members; the basic eligibility requirements for each type of benefit; the scheduled increase in the Social Security retirement age enacted in 1983; and the federal income taxation of Social Security benefits. For other CRS products on Social Security, please see Social Security Issues in Focus. Congressional Research Service Social Security Primer Contents Introduction...................................................................................................................................... 1 Origins and Brief History of Social Security................................................................................... 1 Social Security Financing ................................................................................................................ 3 Taxation of Social Security Benefits ......................................................................................... 4 Status of the Social Security Trust Funds ........................................................................................ 4 Social Security Cash-Flow Surpluses and Deficits ................................................................... 5 Social Security Reform Debate........................................................................................................ 6 Social Security Benefit Rules .......................................................................................................... 6 Full Retirement Age .................................................................................................................. 6 Computation of a Social Security Retired-Worker Benefit ....................................................... 7 Adjustments to Benefits Claimed Before or After the FRA................................................ 8 Other Adjustments to Benefits (Including GPO and WEP) ................................................ 9 Disabled-Worker Benefit........................................................................................................... 9 Benefits for the Worker’s Family Members .............................................................................. 9 Maximum Family Benefit Amount ................................................................................... 10 Social Security Beneficiaries ......................................................................................................... 12 Tables Table 1. Increase in the Full Retirement Age Scheduled Under Current Law................................. 7 Table 2. Computation of a Worker’s Primary Insurance Amount (PIA) in 2012 Based on an Illustrative AIME of $5,000 ..................................................................................... 8 Table 3. Social Security Benefits for the Worker’s Family Members............................................ 11 Table 4. Social Security Beneficiaries, by Type, January 2012 ..................................................... 13 Congressional Research Service Social Security Primer Introduction Social Security is a self-financed program that provides monthly cash benefits to retired or disabled workers and their family members and to the family members of deceased workers. As of January 2012 there were 55.6 million Social Security beneficiaries. Of those, 38.6 million (70%) were retired workers and family members, 10.6 million (19%) were disability beneficiaries, and 6.3 million (11%) were survivors of deceased workers.1 Social Security is financed by payroll taxes paid by covered workers and their employers. An estimated 159.7 million workers are covered by Social Security.2 In 2012, under a temporary 2 percentage point reduction in the Social Security payroll tax rate for workers currently in effect, employees pay 4.2% (rather than 6.2%) and employers pay 6.2% of covered earnings up to the annual limit on taxable earnings ($110,100 in 2012);3 self-employed individuals pay 10.4% (rather than 12.4%) of net self-employment income up to the annual limit ($110,100 in 2012).4 Social Security is also credited with tax revenues from the federal income taxes paid by some beneficiaries on a portion of their benefits. In addition, Social Security receives interest income from Social Security trust fund investments. Social Security income and outgo are accounted for in two separate trust funds authorized under Title II of the Social Security Act: the Federal OldAge and Survivors Insurance (OASI) trust fund and the Federal Disability Insurance (DI) trust fund.5 In 2010, the combined Social Security trust funds (OASDI) had total receipts of $781 billion, total expenditures of $713 billion, and accumulated holdings (assets) of $2.6 trillion.6 Origins and Brief History of Social Security Title II of the original Social Security Act of 19357 established a national plan designed to provide economic security for the nation’s workers. The system of Old-Age Insurance it created provided benefits to individuals who were aged 65 or older and who had “earned” retirement benefits through work in jobs covered by the system. Benefits were to be financed by a payroll tax paid by employees and their employers on wages up to a base amount ($3,000 per year at the time). Monthly benefits were to be based on cumulative wages in covered jobs. The law related the amount of the benefit to the amount of a worker’s wages covered by the program, but the formula was progressive. That is, the formula was weighted to replace a larger share of the 1 Social Security Administration (SSA), Monthly Statistical Snapshot, January 2012, Table 2. See the latest edition of the Monthly Statistical Snapshot at http://www.socialsecurity.gov/policy/docs/quickfacts/stat_snapshot/index.html. Subtotals do not sum to total due to rounding. 2 Currently, 94% of workers in paid employment or self employment are covered by Social Security. (SSA, 2012 Social Security/SSI/Medicare Information, February 28, 2012, at http://www.socialsecurity.gov/legislation/2012factsheet.pdf.) 3 The annual limit on covered wages and net self-employment income subject to the Social Security payroll tax (the taxable wage base) is adjusted annually based on average wage growth, if a Social Security cost-of-living adjustment (COLA) is payable. 4 P.L. 111-312 provided a temporary 2 percentage point reduction in the Social Security payroll tax rate for workers in 2011. P.L. 112-78 extended the temporary payroll tax reduction for workers through February 2012. P.L. 112-96 further extended the temporary payroll tax reduction for workers through December 2012. For more information, see CRS Report R41648, Social Security: Temporary Payroll Tax Reduction, by Dawn Nuschler. 5 In this report, the OASI and DI trust funds are referred to on a combined basis as the Social Security trust funds. 6 SSA, Trust Fund Data, http://www.ssa.gov/OACT/STATS/table4a3.html. 7 P.L. 271, 74th Congress. Congressional Research Service 1 Social Security Primer earnings of low-wage workers compared with those of higher-wage workers. Before the Old-Age Insurance program was in full operation, the Social Security Amendments of 19398 shifted the emphasis of Social Security from protection of the individual worker to protection of the family by extending monthly cash benefits to the dependents and survivors of workers. The program now provided Old-Age and Survivors Insurance (OASI). During the decades that followed, changes to the Social Security program were mainly ones of expansion. Coverage of workers became nearly universal (the largest groups remaining outside the system are state and local government employees who have not chosen to join the system and federal employees who were hired before 1984). In 1956, Congress established the Disability Insurance (DI) program.9 Over the years, there were increases in the payroll tax rate, which increased from 2.0% of pay (1.0% each for employees and employers) in the 1937-1949 period to its current level of 12.4%.10 In addition, there were increases in the amount of wages subject to the payroll tax (the taxable wage base), which increased from $3,000 in the 1937-1950 period to its current level of $110,100.11 The types of individuals eligible for benefits were expanded over the years,12 and benefit levels were increased periodically. In 1972, legislation provided for automatic cost-of-living adjustments, starting in 1975, indexed to the change in consumer prices as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) published by the Department of Labor’s Bureau of Labor Statistics.13 Beginning in the late 1970s, legislative action regarding Social Security became more concentrated on solving persistent financing problems. Legislation enacted in 1977 raised taxes and curtailed future benefit growth in an effort to shore up the system’s finances.14 Still, in 1982, the OASI trust fund needed to borrow assets from the DI trust fund and the Medicare Hospital Insurance (HI) trust fund (borrowed amounts were fully repaid by 1986). In 1983, Congress passed additional major legislation that was projected to restore solvency to the Social Security system on average over the 75-year projection period at that time.15 8 P.L. 379, 76th Congress. 9 The DI program was established by the Social Security Amendments of 1956 (P.L. 880, 84th Congress). The program became known as the Old-Age, Survivors, and Disability Insurance (OASDI) program, the formal name for Social Security. 10 Congress has increased the Social Security payroll tax rate many times over the program’s history. The payroll tax rate under current law (12.4%) was established by the Social Security Amendments of 1983 (P.L. 98-21). P.L. 98-21 increased the payroll tax rate gradually from 11.4% in 1984 to 12.4% in 1990. 11 The taxable wage base amounts ($3,000 and $110,100) are in nominal dollars. The most recent legislative change to the Social Security taxable wage base was in 1977. The Social Security Amendments of 1977 (P.L. 95-216) established ad-hoc increases in the taxable wage base for 1979, 1980, and 1981, followed by a return to automatic wage indexation for 1982 and subsequent years. 12 For example, the Social Security Amendments of 1965 (P.L. 89-97) established benefits for divorced wives aged 62 or older. 13 See the Social Security Amendments of 1972 (P.L. 92-603). For more information, see CRS Report 94-803, Social Security: Cost-of-Living Adjustments, by Gary Sidor. 14 See the Social Security Amendments of 1977 (P.L. 95-216). 15 Following the Social Security Amendments of 1983 (P.L. 98-21), projections showed the re-emergence of long-range deficits as a result of changes in actuarial methods and assumptions and because program changes had been evaluated with respect to their effect on the average 75-year deficit. That is, while program changes were projected to restore trust fund solvency on average over the 75-year projection period, a period of surpluses was followed by a period of deficits. As time passed, the inclusion of additional deficit years in the 75-year valuation period resulted in a return to projected long-range deficits. Congressional Research Service 2 Social Security Primer Current projections by the Social Security Board of Trustees show that the Social Security system has a long-range funding shortfall and that the system will operate with annual cash-flow deficits each year through the end of the 75-year projection period (2086). These projections, and other factors, have focused attention on potential Social Security program changes.16 Social Security Financing The Social Security program is financed primarily by revenues from Federal Insurance Contributions Act (FICA) taxes and Self Employment Contributions Act (SECA) taxes. FICA taxes are paid by both employers and employees, but it is employers who remit the taxes to the U.S. Treasury. Employers remit FICA taxes on a regular basis throughout the year (e.g., weekly, monthly, quarterly, or annually), depending on the employer’s level of total employment taxes (Social Security, Medicare, and federal individual income tax withholding). The FICA tax rate of 7.65% each for employers and employees has two components: 6.2% for Social Security and 1.45% for Medicare HI. Under current law (noting the exception for 2012 in which the Social Security payroll tax rate is reduced by 2 percentage points for workers), employers and employees each pay 6.2% of covered wages, up to the taxable wage base, in Social Security payroll taxes. The SECA tax rate is 15.3% for self-employed individuals, with 12.4% for Social Security and 2.9% for Medicare HI. Self-employed individuals pay 12.4% of net self-employment income, up to the taxable wage base, in Social Security payroll taxes (again noting the exception for 2012). One-half of the SECA taxes are allowed as a deduction for federal income tax purposes.17 SECA taxes are normally paid once a year as part of filing an annual individual income tax return.18 In addition to Social Security payroll taxes, the Social Security program has two other sources of income. First, certain Social Security beneficiaries must include a portion of Social Security benefits in taxable income for the federal income tax, and the Social Security program receives part of those taxes.19 Second, the Social Security program receives interest from the U.S. Treasury on its investments in special U.S. government obligations. As the Managing Trustee of the Social Security trust funds, the Secretary of the Treasury is required by law to invest Social Security revenues in interest-bearing federal government securities held by the trust funds.20 The revenues exchanged for the federal government securities are deposited into the general fund of the U.S. Treasury and are indistinguishable from revenues in the general fund that come from other sources. Because the assets held by the trust funds are 16 For more information, see CRS Report RL33544, Social Security Reform: Current Issues and Legislation, by Dawn Nuschler. 17 Self-employed individuals are required to pay Social Security payroll taxes if they have annual net earnings of $400 or more. Only 92.35% of net self-employment income (up to the annual limit) is taxable. 18 If a self-employed person does not pay him/herself wages, SECA taxes are paid annually on the Internal Revenue Service Form 1040 (U.S. Individual Income Tax Return). If a self-employed person does pay him/herself wages, FICA taxes are paid during the year along with any FICA tax payments for his or her employees. 19 The taxes associated with including Social Security benefits in federal taxable income go to the Social Security trust funds and the Medicare HI trust fund. See CRS Report RL32552, Social Security: Calculation and History of Taxing Benefits, by Christine Scott. 20 Social Security Act, Title II, §201(d). For more information, see CRS Report RS20607, Social Security: Trust Fund Investment Practices, by Dawn Nuschler. Congressional Research Service 3 Social Security Primer federal government securities, the trust fund balance represents the amount of money owed to the Social Security trust funds by the general fund of the U.S. Treasury. Funds needed to pay Social Security benefits and administrative expenses come from the redemption of federal government securities held by the trust funds.21 Taxation of Social Security Benefits Since 1984, Social Security benefits have been subject to the federal income tax. First, as part of the Social Security Amendments of 1983 (P.L. 98-21), Congress made up to 50% of a person’s Social Security benefits subject to the federal income tax if he or she has modified adjusted gross income (AGI) above a specified threshold ($25,000 for an individual tax filer and $32,000 for a married couple filing jointly). Modified AGI is defined as the total income from all sources recognized for tax purposes plus certain otherwise tax-exempt income, including half of Social Security benefits. Tax revenues from this “first tier” of taxation are credited to the Social Security trust funds. In 2010, the trust funds received $23.9 billion (3.1% of total trust fund income) from this provision. Second, as part of the Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66), Congress made up to 85% of a person’s Social Security benefits subject to the federal income tax if he or she has modified AGI above a second higher threshold ($34,000 for an individual tax filer and $44,000 for a married couple filing jointly). Tax revenues from this “second tier” of taxation are credited to the Medicare HI trust fund. In 2010, the HI trust fund received $13.8 billion (6.4% of total trust fund income) from this provision. The income thresholds are fixed under current law (i.e., they are not adjusted for inflation or wage growth), so that over time an increasing number of beneficiaries will be subject to the federal income tax on benefits. According to the Congressional Budget Office, in 2005, 16.9 million Social Security beneficiaries (39%) were affected by the income taxation of Social Security benefits.22 Status of the Social Security Trust Funds Projections by the Social Security Board of Trustees (the trustees) show that Social Security expenditures will exceed tax revenues each year through the end of the 75-year valuation period (2086).23 That is, Social Security will operate with annual cash-flow deficits. However, when interest income to the trust funds is taken into account, Social Security is projected to have a total surplus (tax revenues plus interest income will exceed expenditures) each year through 2020. At the end of 2010, the trust funds were credited with accumulated assets of $2.6 trillion. The trustees project that the trust fund balance will continue to grow over the next several years, peaking at $3.1 trillion in nominal dollars ($2.5 trillion in constant 2012 dollars) at the end of 21 Social Security Administration, Trust Fund FAQs, http://www.socialsecurity.gov/OACT/ProgData/fundFAQ.html. For more information, see CRS Report RL32552, Social Security: Calculation and History of Taxing Benefits, by Christine Scott. 23 Projections are based on the intermediate assumptions of The 2012 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, April 23, 2012, available at http://www.socialsecurity.gov/OACT/TR/2012/. For more information on the trust fund projections, see CRS Report RL33028, Social Security: The Trust Fund, by Dawn Nuschler and Gary Sidor. 22 Congressional Research Service 4 Social Security Primer 2020. Beginning in 2021, Social Security expenditures will exceed total income (tax revenues plus interest income) and trust fund assets will begin to be drawn down to help pay for benefits and administrative costs. Social Security’s projected long-range funding shortfall is attributed primarily to demographic factors (such as lower fertility rates and increasing life expectancy) and program design features (such as a wage-indexed benefit formula and annual COLAs).24 Long-range projections by the trustees show that Social Security expenditures will exceed income by 19% on average over the next 75 years. The trustees project that the accumulated trust fund assets will be exhausted in 2033 (assets will be drawn down from 2021 to 2033).25 Social Security benefits scheduled under current law can be paid in full and on time until trust fund assets are exhausted (2033). After trust fund exhaustion, incoming Social Security receipts are projected to be sufficient to pay 75% of benefits scheduled under current law in 2033 and 73% of scheduled benefits in 2086. Social Security Cash-Flow Surpluses and Deficits From 1984 to 2009, Social Security generated surplus tax revenues (i.e., the program operated with annual cash flow surpluses). Surplus tax revenues and interest income credited to the trust funds in the form of federal government securities contributed to a growing trust fund balance. Surplus Social Security tax revenues totaled $1.21 trillion (in nominal dollars) from 1984 to 2009. When Social Security operates with a cash flow deficit as it does now (i.e., when expenditures exceed tax revenues), the program cashes in federal government securities held in the trust funds to supplement current Social Security tax revenues. General revenues are used to redeem the federal government securities held by the trust funds. The increased spending for Social Security from the general fund can only be paid for by the federal government raising taxes or other income, reducing other spending, or borrowing from the public (i.e., replacing bonds held by the trust funds with bonds held by the public). Stated another way, the emergence of cash flow deficits in 2010 means that the program is relying on interest credited to the trust funds to meet annual program costs (to help pay for benefits and administrative costs). Interest is credited to the trust funds in the form of new special issue securities; it does not represent a financial resource for the federal government from outside sources. General revenues are used to redeem the federal securities held by the Social Security trust funds to cover the difference between Social Security tax revenues and program costs. With respect to the program’s reliance on general revenues starting in 2010, it is important to note that the program is relying on revenues collected for Social Security purposes in previous years that were used by the federal government at the time for other (non-Social Security) spending needs. The Social Security program draws on those previously collected Social Security tax revenues (plus interest) when current Social Security tax revenues fall below current program expenditures. 24 A wage-indexed benefit formula allows initial monthly benefits for successive groups of beneficiaries to keep pace with increases in the standard of living. An annual COLA for benefits already in payment allows benefits to keep pace with increases in prices. 25 The trustees project that the OASI trust fund will be exhausted in 2035; the DI trust fund will be exhausted in 2016. Congressional Research Service 5 Social Security Primer Social Security Reform Debate Restoring trust fund solvency, and other policy objectives, have made Social Security reform an issue of ongoing congressional interest and debate. Some policy objectives focus on improving the adequacy and equity of benefits, while others reflect different philosophical views about the role of the Social Security program and the federal government in providing retirement income. The debate reflects two fundamentally different approaches to reform. The traditional approach would maintain the current structure of the program (i.e., a defined benefit system funded on a pay-as-you-go basis) by making relatively modest changes, such as an increase in the retirement age or an increase in the taxable wage base. Generally, the goal of this approach is to preserve the social insurance nature of the program. By contrast, the personal savings and investment approach would redesign the 1930s-era program to create a pre-funded system in which benefits would be based partially or entirely on personal savings and investments.26 Social Security Benefit Rules Social Security provides monthly cash benefits to retired or disabled workers and to the family members of retired, disabled, or deceased workers. The computation of a worker’s primary insurance amount (PIA) is based on his or her earnings record in Social Security-covered employment. The worker’s PIA is the initial monthly benefit amount payable at the full retirement age (i.e., before any adjustments for early or delayed retirement). Benefits paid to the family members of a worker are based on a percentage of the worker’s PIA. The eligibility requirements for each category of benefits differ, as described below. Full Retirement Age Social Security retirement benefits are first payable to retired workers at the age of 62, subject to a permanent reduction for early retirement. The age at which full (or unreduced) retirement benefits are first payable is the full retirement age (FRA).27 For most of the program’s history, the FRA was 65. As part of the Social Security Amendments of 1983 (P.L. 98-21), Congress raised the FRA from 65 to 67. The 1983 law established a gradual phase-in from 65 to 67 over a 22-year period (2000 to 2022). Specifically, persons born in 1938 or later are affected by the increase in the FRA (i.e., persons who become eligible for retirement benefits at age 62 in 2000 or later). The increase in the FRA will be fully phased-in for persons born in 1960 or later (i.e., persons who become eligible for retirement benefits at age 62 in 2022 or later). Table 1 shows the scheduled increase in the FRA being phased-in under current law.28 26 For more information, see CRS Report RL33544, Social Security Reform: Current Issues and Legislation, by Dawn Nuschler. 27 The full retirement age is also called the normal retirement age (NRA). 28 For more information, see CRS Report R41962, Fact Sheet: The Social Security Retirement Age, by Alison M. Shelton. Congressional Research Service 6 Social Security Primer Table 1. Increase in the Full Retirement Age Scheduled Under Current Law Year of Birth Full Retirement Age 1938 65 and 2 months 1939 65 and 4 months 1940 65 and 6 months 1941 65 and 8 months 1942 65 and 10 months 1943 to 1954 66 1955 66 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months 1960 or later 67 Source: SSA, 2012 Social Security/SSI/Medicare Information, February 28, 2012, available at http://www.socialsecurity.gov/legislation/2012factsheet.pdf. Computation of a Social Security Retired-Worker Benefit To be eligible for a Social Security retired-worker benefit, a person generally needs a minimum of 40 earnings credits, or 10 years of Social Security-covered employment (among other requirements).29 A worker’s initial monthly benefit is based on his or her 35 highest years of earnings, which are indexed to historical wage growth (earnings through age 60 are indexed; earnings thereafter are counted at nominal value). The 35 highest years of indexed earnings are divided by 35 to determine the worker’s career-average annual earnings. The resulting amount is divided by 12 to determine the worker’s average indexed monthly earnings (AIME). If a worker has fewer than 35 years of earnings in covered employment, years of no earnings are entered as zeros in the computation, resulting in a lower AIME and therefore a lower monthly benefit. The worker’s PIA is determined by applying a formula to the AIME as shown in Table 2. First, the AIME is sectioned into three brackets (or segments) of earnings, which are divided by dollar amounts known as bend points. In 2012, the bend points are $767 and $4,624.30 Three progressive replacement factors—90%, 32%, and 15%—are applied to the three brackets of AIME.31 The three products derived from multiplying each replacement factor and bracket of AIME are added together. For workers who become eligible for retirement benefits (i.e., those who attain age 62), become disabled, or die in 2012, the PIA is determined as shown in the example in Table 2. 29 A worker may earn a maximum of four earnings credits (or quarters of coverage, QCs) per calendar year. In 2012, a worker earns one QC for each $1,130 of covered earnings, up to a maximum of four QCs for earnings of $4,520 or more. 30 The bend points in the benefit formula are indexed to average wage growth under current law. 31 The replacement factors in the benefit formula are fixed under current law. Congressional Research Service 7 Social Security Primer Table 2. Computation of a Worker’s Primary Insurance Amount (PIA) in 2012 Based on an Illustrative AIME of $5,000 Factors Three Brackets of AIME 90% first $767 of AIME, plus 32% AIME over $767 and through $4,624, plus 15% AIME over $4,624 PIA for Worker with an Illustrative AIME of $5,000 Total: Worker’s PIA $690.30 $1,234.20 $56.40 $1,980.90 Source: Congressional Research Service. A worker’s PIA increases each year from the year of eligibility (at age 62) to the year of benefit receipt based on the Social Security COLA. In addition, Social Security benefits already in payment increase each year based on the COLA.32 Adjustments to Benefits Claimed Before or After the FRA A worker’s initial monthly benefit is equal to his or her PIA if he or she begins receiving benefits at the FRA. A worker’s initial monthly benefit will be less than his or her PIA if he or she begins receiving benefits before the FRA, and it will be greater than his or her PIA if he or she begins receiving benefits after the FRA. A retired-worker benefit is payable as early as the age of 62, however, the benefit will be permanently reduced to reflect the longer expected period of benefit receipt. Retirement benefits are reduced by five-ninths of 1% (or 0.0056) of the worker’s PIA for each month of entitlement before the FRA up to 36 months, for a reduction of about 6.7% a year. For each month of benefit entitlement before the FRA in excess of 36 months, retirement benefits are reduced by fivetwelfths of 1% (or 0.0042), for a reduction of 5% a year. Workers who delay filing for benefits until after the FRA receive a delayed retirement credit (DRC). The DRC applies beginning with the month the worker attains the FRA and ending with the month before he or she attains the age of 70. Starting in 1990, the DRC increased until it reached 8% per year for workers born in 1943 or later (i.e., starting with those who attained age 62 in 2005 or age 66 in 2009). The actuarial adjustment to benefits claimed before or after the FRA is intended to provide the worker with roughly the same total lifetime benefits, regardless of the age at which he or she begins receiving benefits. Therefore, if a worker claims benefits before the FRA, his or her monthly benefit is reduced to take into account the longer expected period of benefit receipt. For a worker whose FRA is 66, the decision to claim benefits at the age of 62 results in a 25% reduction in his or her PIA. For a worker whose FRA is 67, the decision to claim benefits at the age of 62 results in a 30% reduction in his or her PIA. Similarly, if a worker claims benefits after the FRA, his or her monthly benefit is increased to take into account the shorter expected period of benefit receipt. 32 A Social Security COLA was not payable in 2010 and 2011. For more information, see CRS Report 94-803, Social Security: Cost-of-Living Adjustments, by Gary Sidor. Congressional Research Service 8 Social Security Primer Other Adjustments to Benefits (Including GPO and WEP) Other adjustments to benefits may apply, such as those related to simultaneous entitlement to more than one type of Social Security benefit. Under the dual entitlement rule, a Social Security spousal benefit is reduced if the person is receiving a Social Security retired-worker benefit. Under the government pension offset (GPO), a Social Security spousal benefit is reduced if the spousal beneficiary is receiving a pension from work that was not covered by Social Security (a non-covered pension).33 Under the windfall elimination provision (WEP), the Social Security benefit formula is modified to reduce benefits for a worker beneficiary who has a pension from non-covered employment in federal, state, or local governments.34 Under the retirement earnings test (RET), the monthly Social Security benefit is reduced for a person who is below the FRA and has wage or salary income above an annual dollar threshold (an annual exempt amount).35 Under the Social Security maximum family benefit provision (discussed below), the benefits of individual family members may be reduced to keep the total benefits payable to a family based on the worker’s record within a specified limit. Disabled-Worker Benefit For Social Security disability benefits, “disability” is defined as the inability to engage in substantial gainful activity (SGA) by reason of a medically determinable physical or mental impairment expected to result in death or last at least 12 months. Generally, the worker must be unable to do any kind of work that exists in the national economy, taking into account age, education, and work experience. As noted above, a worker generally needs a minimum of 40 quarters of coverage for a Social Security retired-worker benefit. A worker may qualify for Social Security disabled-worker benefits with fewer quarters of coverage, depending on the age at which the worker became disabled. However, a minimum of six quarters of coverage is needed. Similarly, while the worker’s 35 highest years of earnings are used to compute a retired-worker benefit, fewer years of earnings may be used to compute a disabled-worker benefit. Because a disabled worker’s benefit is not reduced for entitlement before the FRA, a disabled worker’s benefit is equal to his or her PIA.36 Benefits for the Worker’s Family Members Social Security is often viewed as a program that provides benefits to retired or disabled workers. However, approximately 20% of current Social Security beneficiaries are dependents and survivors of retired, disabled, or deceased workers.37 33 For more information on the dual entitlement rule and the GPO, see CRS Report RL32453, Social Security: The Government Pension Offset (GPO), by Alison M. Shelton. 34 For more information on the WEP, see CRS Report 98-35, Social Security: The Windfall Elimination Provision (WEP), by Alison M. Shelton. 35 For more information on the RET, see CRS Report R41242, Social Security Retirement Earnings Test: How Earnings Affect Benefits, by Dawn Nuschler and Alison M. Shelton. 36 For more information, see CRS Report RL32279, Primer on Disability Benefits: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI), by Umar Moulta-Ali. 37 Social Security Administration, Monthly Statistical Snapshot, January 2012, Table 2. See the latest edition of the Monthly Statistical Snapshot at http://www.socialsecurity.gov/policy/docs/quickfacts/stat_snapshot/index.html. Congressional Research Service 9 Social Security Primer Social Security benefits are payable to the spouse, divorced spouse, or child of a retired or disabled worker. Social Security benefits are also payable to the widow(er), divorced widow(er), child, or parent of a deceased worker. In addition, in the case of a deceased worker, benefits are payable to the mother or father of a deceased worker’s child when the child is under the age of 16 or disabled and entitled to a Social Security child’s benefit based on the worker’s record.38 Benefits payable to family members are equal to a specified percentage of the worker’s PIA, subject to a maximum family benefit amount. For example, the spouse of a retired worker may receive up to 50% of the retired worker’s PIA, and the widow(er) of a deceased worker may receive up to 100% of the deceased worker’s PIA. Benefits paid to family members may be subject to adjustments based on the person’s age at entitlement, receipt of his or her own Social Security retired-worker benefit, and other factors, as described above. Table 3 provides a summary of Social Security benefits payable to family members of a retired, disabled, or deceased worker, including basic eligibility requirements and basic benefit amounts before any applicable adjustments are made (such as for the maximum family benefit amount).39 Maximum Family Benefit Amount The total amount of Social Security benefits payable to a family based on a retired or deceased worker’s record is capped by the maximum family benefit amount. The maximum family benefit varies from 150% to 188% of the retired or deceased worker’s PIA. It cannot be exceeded regardless of the number of beneficiaries entitled to benefits on the worker’s record.40 If the sum of all benefits based on the worker’s record exceeds the maximum family benefit amount, each dependent’s or survivor’s benefit is reduced in equal proportion to bring the total amount of benefits within the family maximum. For the family of a worker who attains the age of 62 in 2012, or dies in 2012 before attaining the age of 62, the total amount of benefits payable is limited to • 150% of the first $980 of PIA, plus • 272% of PIA over $980 and through $1,415, plus • 134% of PIA over $1,415 and through $1,845, plus • 175% of PIA over $1,845. The dollar amounts in the maximum family benefit formula ($980, $1,415, and $1,845 in 2012) are indexed to average wage growth, as in the regular benefit formula. A different family maximum applies in the case of a disabled worker. For the family of a worker who is entitled to disability benefits, the maximum family benefit is the lesser of 85% of the worker’s AIME or 150% of the worker’s PIA. In no case, however, can the family benefit be less than 100% of the worker’s PIA.41 38 To receive mother’s or father’s benefits, the person must be unmarried and must not be entitled to widow(er)’s benefits. 39 For related information, see CRS Report RS22294, Social Security Survivors Benefits, by Scott Szymendera; and CRS Report R41479, Social Security: Revisiting Benefits for Spouses and Survivors, by Alison M. Shelton and Dawn Nuschler. 40 Social Security Act, Title II, §203. 41 Benefits for a divorced beneficiary are not taken into account for purposes of the family maximum. Social Security Administration, Program Operations Manual System (POMS), Section RS 00615.682, “Family Benefits Where a (continued...) Congressional Research Service 10 Social Security Primer Table 3. Social Security Benefits for the Worker’s Family Members Basis for Entitlement Spouse Basic Eligibility Requirements At least age 62, or Basic Benefit Amount Before Any Applicable Adjustments 50% of worker’s PIA Any age if caring for the child of a retired or disabled worker. The child must be under the age of 16 or disabled and entitled to a child’s benefit based on the worker’s record. The worker on whose record benefits are based must be receiving benefits. Divorced Spouse At least age 62 (if divorced individual was married to the worker for at least 10 years before the divorce became final and is currently unmarried) Generally, the worker on whose record benefits are based must be receiving benefits. However, a divorced spouse may receive benefits on the worker’s record if the worker is eligible for (but not receiving) benefits and the divorce has been final for at least two years. 50% of worker’s PIA (Note: A divorced spouse who is under the age of 62 is not eligible for spousal benefits even if he or she is caring for the child of a retired or disabled worker and the child is entitled to benefits based on the worker’s record.) Widow(er) & Divorced Widow(er) At least age 60 100% of worker’s PIA At least age 50 100% of worker’s PIA (if divorced individual was married to the worker for at least 10 years before the divorce became final and did not remarry before age 60) Disabled Widow(er) & Divorced Disabled Widow(er) (if divorced individual was married to the worker for at least 10 years before the divorce became final and did not remarry before age 50) The qualifying disability must have occurred: (1) before or within seven years of the worker’s death; or (2) within seven years of having been previously entitled to benefits on the worker’s record as a widow(er) with a child in his or her care; or (3) within seven years of having been previously entitled to benefits as a disabled widow(er) that ended because the qualifying disability ended (whichever is later). (...continued) Divorced Spouse or a Surviving Divorced Spouse is Entitled,” available at https://secure.ssa.gov/apps10/poms.nsf/lnx/ 0300615682. Congressional Research Service 11 Social Security Primer Basis for Entitlement Mothers and Fathers Parents Child Basic Eligibility Requirements Basic Benefit Amount Before Any Applicable Adjustments Surviving parent of any age who cares for the deceased worker’s child, when the child is either under age 16 or disabled and entitled to a child’s benefit based on the deceased worker’s record. To receive mother’s or father’s benefits, the person must be unmarried and not entitled to widow(er)’s benefits. 75% of deceased worker’s PIA At least age 62 and has not married since the worker’s death. The parent must have been receiving at least one-half of his or her support from the worker at the time of the worker’s death or, if the worker had a period of disability which continued until death, at the beginning of the period of disability. If one parent is entitled to benefits: 82.5% of deceased worker’s PIA A child (including a dependent, unmarried biological child, adopted child, stepchild, and, in some cases, grandchild) of a retired, disabled, or deceased worker who was fully or currently insured at the time of death. The child must be 50% of worker’s PIA for child of a retired or disabled worker (subject to the maximum family benefit amount) If two parents are entitled to benefits: 75% of deceased worker’s PIA (for each) (subject to the maximum family benefit amount) 75% of deceased worker’s PIA for child of a deceased worker (subject to the maximum family benefit amount) (1) under age 18; or (2) a full-time elementary or secondary student under age 19; or (3) a disabled person aged 18 or older whose disability began before age 22. Source: Congressional Research Service. Notes: The table shows the minimum eligibility age for each type of benefit (i.e., the age at which benefits are first payable on a reduced basis). The maximum family benefit may apply, reducing the benefit received by each family member on a proportional basis. The maximum family benefit varies from 150% to 188% of a retired or deceased worker’s PIA. For the family of a worker who is entitled to disability benefits, the maximum family benefit is the lesser of 85% of the worker’s AIME or 150% of the worker’s PIA, but no less than 100% of the worker’s PIA. Other benefit adjustments may apply. Social Security Beneficiaries In January 2012, there were 55.6 million Social Security beneficiaries. Retired-worker and disabled-worker beneficiaries account for approximately 80% of the beneficiary population. As shown in Table 4, the largest category of beneficiaries is retired workers (64.4% of the total), with an average monthly benefit of $1,230.50. The second-largest category of beneficiaries is disabled workers (15.5% of the total), with an average monthly benefit of $1,110.60. Family members of retired, disabled, and deceased workers account for the remainder of the beneficiary population (approximately 20% of the total). Table 4 provides recent statistics on the Social Congressional Research Service 12 Social Security Primer Security beneficiary population, including the number, percentage, and average benefit amount by type of beneficiary. Table 4. Social Security Beneficiaries, by Type, January 2012 Number of Beneficiaries (in thousands) Percentage of Beneficiaries Total Monthly Benefits ($ in millions) Average Monthly Benefits (in dollars) 55,558 100% $62,468 $1,124.40 Retired workers 35,752 64.4 43,992 1,230.50 Spouses 2,289 4.1 1,392 608.00 Children 599 1.1 362 604.00 4,212 7.6 4,872 1,156.70 146 0.3 128 871.90 1,916 3.4 1,504 784.70 8,596 15.5 9,547 1,110.60 Spouses 162 0.3 48 298.70 Children 1,884 3.4 623 330.60 Type of Beneficiary All beneficiaries Old-Age Insurance Survivors Insurance Widow(er)s and parentsa Widowed mothers and fathersb Children Disability Insurance Disabled workers Source: Table reproduced from the Social Security Administration, Monthly Statistical Snapshot, January 2012, Table 2. See the latest edition of the Monthly Statistical Snapshot at http://www.socialsecurity.gov/policy/docs/ quickfacts/stat_snapshot/index.html. Notes: Data are for the end of the specified month. Only beneficiaries in current-payment status are included. Some Social Security beneficiaries are entitled to more than one type of benefit. In most cases, they are dually entitled to a worker benefit and a higher spouse or widow(er) benefit. If both benefits are financed from the same trust fund, the beneficiary is usually counted only once in the statistics, as a retired-worker or a disabledworker beneficiary, and the benefit amount recorded is the larger amount that combines the worker’s own benefit with the auxiliary benefit. If the benefits are paid from different trust funds the beneficiary is counted twice, and the respective benefit amounts are recorded for each type of benefit. a. Includes nondisabled widow(er)s aged 60 or older, disabled widow(er)s aged 50 or older, and dependent parents of deceased workers aged 62 or older. b. A widow(er) or surviving divorced parent caring for the entitled child of a deceased worker who is under age 16 or is disabled. Key Policy Staff Area of Expertise Name Phone E-mail Social Security Dawn Nuschler 7-6283 dnuschler@crs.loc.gov Congressional Research Service 13 Social Security Primer Area of Expertise Name Phone E-mail Social Security Alison Shelton 7-9558 ashelton@crs.loc.gov Social Security: Taxation of Benefits Christine Scott 7-7366 cscott@crs.loc.gov Social Security Disability Insurance Umar Moulta-Ali 7-9557 umoultaali@crs.loc.gov Social Security Disability Insurance Scott Szymendera 7-0014 sszymendera@crs.loc.gov Congressional Research Service 14