. Social Security Primer Dawn Nuschler Specialist in Income Security March 10, 2015 Congressional Research Service 7-5700 www.crs.gov R42035 c11173008 Social Security Primer . Summary The Social Security program began in the 1930s and has been modified by Congress many times over the years. 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 81% are retired or disabled workers, and 19% are the family members of retired, disabled, or deceased workers. In December 2014, there were 59 million beneficiaries who received a total of nearly $72 billion in benefit payments for the month, with an average monthly benefit of $1,215. 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 2015, employers and employees each pay 6.2% of covered earnings, up to the annual limit on taxable earnings ($118,500 in 2015). Among other requirements, a worker generally needs 40 earnings credits (10 years of covered employment) to be eligible for a Social Security retired-worker benefit. Fewer earnings credits are needed to qualify for a disabled-worker benefit; the number needed varies depending on the age of the worker when he or she became disabled. 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 or later). 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 2014, the Social Security trust funds had receipts totaling $884 billion, expenditures totaling $859 billion, and accumulated assets (in the form of Treasury securities) totaling $2.8 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 about 21% on average over the next 75 years. Restoring long-range trust fund solvency and other policy objectives (such as increasing benefits for certain groups of beneficiaries) have made Social Security reform an issue of ongoing congressional interest and debate. This report provides an overview of Social Security financing 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 Issues Before Congress (Social Policy / Social Security). c11173008 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 ........................................................................................ 5 Social Security Cash-Flow Surpluses and Deficits ................................................................... 6 Social Security Reform Debate........................................................................................................ 7 Social Security Benefit Rules .......................................................................................................... 7 Full Retirement Age .................................................................................................................. 7 Computation of a Social Security Retired-Worker Benefit ....................................................... 8 Adjustments to Benefits Claimed Before or After the FRA ................................................ 9 Other Adjustments to Benefits (Including GPO and WEP) .............................................. 10 Disabled-Worker Benefit ......................................................................................................... 10 Benefits for the Worker’s Family Members ............................................................................ 11 Maximum Family Benefit ................................................................................................. 11 Social Security Beneficiaries ......................................................................................................... 14 Tables Table 1. Increase in the Full Retirement Age Scheduled Under Current Law ................................. 8 Table 2. Computation of a Worker’s Primary Insurance Amount (PIA) in 2015 Based on an Illustrative AIME of $5,000 ..................................................................................... 9 Table 3. Social Security Benefits for the Worker’s Family Members............................................ 12 Table 4. Social Security Beneficiaries, by Type, December 2014 ................................................. 15 Contacts Author Contact Information........................................................................................................... 15 Key Policy Staff ............................................................................................................................. 15 c11173008 Congressional Research Service Social Security Primer . Introduction Social Security is a primarily 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.1 As of December 2014, there were 59 million Social Security beneficiaries. Of those, 42 million (71%) were retired workers and family members, 11 million (19%) were disabled workers and family members, and 6 million (10%) were survivors of deceased workers.2 Social Security is financed primarily by payroll taxes paid by covered workers and their employers. An estimated 167.5 million workers are covered by Social Security.3 Employers and employees each pay 6.2% of covered earnings, up to the annual limit on taxable earnings ($118,500 in 2015);4 self-employed individuals pay 12.4% of net self-employment income, up to the annual limit ($118,500 in 2015).5 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 Old-Age and Survivors Insurance (OASI) Trust Fund and the Federal Disability Insurance (DI) Trust Fund. In this report, the separate OASI and DI trust funds are referred to on a combined basis as the Social Security trust funds.6 In 2014, the combined Social Security trust funds (OASDI) had total receipts of $884 billion, total expenditures of $859 billion, and accumulated holdings (assets) of $2.8 trillion.7 Origins and Brief History of Social Security Title II of the original Social Security Act of 19358 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 1 A person may receive retired-worker benefits and continue to have earnings. However, under certain circumstances, earnings may affect the amount of a person’s monthly benefit. 2 Social Security Administration (SSA), Monthly Statistical Snapshot, December 2014, Table 2. See the latest edition of the Monthly Statistical Snapshot at http://www.socialsecurity.gov/policy/docs/quickfacts/stat_snapshot/index.html. 3 Currently, 94% of workers in paid employment or self-employment are covered by Social Security. (SSA, 2015 Social Security/SSI/Medicare Information, February 9, 2015, at http://www.socialsecurity.gov/legislation/ 2015%20Fact%20Sheet.pdf.) 4 The annual limit on covered wages and net self-employment income that is 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. 5 In 2011, there was a temporary 2 percentage point reduction in the Social Security payroll tax rate for workers under P.L. 111-312. The temporary reduction was extended through February 2012 under P.L. 112-78, and further extended through December 2012 under P.L. 112-96. For more information, see CRS Report R41648, Social Security: Temporary Payroll Tax Reduction. 6 Under current law, the OASI and DI trust funds do not have authority to borrow from each other. However, in the past, Congress has authorized temporary interfund borrowing among the OASI, DI and Medicare Hospital Insurance trust funds to deal with funding imbalances. Similarly, Congress has reallocated Social Security payroll taxes between the OASI and DI trust funds in the past for the same purpose. For this reason, the OASI and DI trust funds are discussed on a combined basis in this CRS report. 7 SSA, Trust Fund Data, http://www.ssa.gov/OACT/STATS/table4a3.html. 8 P.L. 271, 74th Congress. c11173008 Congressional Research Service 1 Social Security Primer . 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 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 19399 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.10 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%.11 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 $118,500.12 The types of individuals eligible for benefits were expanded over the years,13 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.14 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.15 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).16 In 1983, Congress 9 P.L. 379, 76th Congress. 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. 11 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. 12 The taxable wage base amounts ($3,000 and $118,500) are in current 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. 13 For example, the Social Security Amendments of 1965 (P.L. 89-97) established benefits for divorced wives aged 62 or older. 14 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. 15 See the Social Security Amendments of 1977 (P.L. 95-216). 16 For more information, see CRS Report R43318, Social Security Disability Insurance (DI) Trust Fund: Background and Solvency Issues. 10 c11173008 Congressional Research Service 2 Social Security Primer . 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.17 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 (2088). These projections, and other factors, have focused attention on potential Social Security program changes.18 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.19 Under current law, 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. One-half of the SECA taxes are allowed as a deduction for federal income tax purposes.20 SECA taxes are normally paid once a year as part of filing an annual individual income tax return.21 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.22 Second, the Social Security program receives interest from the U.S. Treasury on its investments in special U.S. government obligations. 17 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 surplus years was followed by a period of deficit years. As time passed, the inclusion of additional deficit years in the 75-year valuation period resulted in a return to projected long-range deficits. 18 For more information, see CRS Report RL33544, Social Security Reform: Current Issues and Legislation. 19 The Patient Protection and Affordable Care Act (ACA, P.L. 111-148) imposed an additional Medicare HI tax of 0.9 percentage point on high-income workers with wages over $200,000 for single filers and $250,000 for joint filers, effective for taxable years beginning in 2013. 20 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. 21 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. 22 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 (continued...) c11173008 Congressional Research Service 3 Social Security Primer . 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.23 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 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.24 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/she has provisional income above a specified threshold ($25,000 for an individual tax filer and $32,000 for a married couple filing jointly). Provisional income 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 2013, the trust funds received $21.1 billion (2.5% of total trust fund income) from this provision.25 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 provisional income 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 2013, the HI trust fund received $14.3 billion (5.7% of total trust fund income) from this provision.26 The income thresholds are fixed under current law (i.e., they are not adjusted for inflation or wage growth). Over time an increasing number of beneficiaries will be subject to the federal income tax on benefits. The Congressional Budget Office (CBO) estimates that about half of current Social Security beneficiaries are affected by the taxation of benefits.27 (...continued) Benefits. 23 Social Security Act, Title II, §201(d). For more information, see SSA, Office of the Chief Actuary, Actuarial Note Number 142, Social Security Trust Fund Investment Policies and Practices, by Jeffrey L. Kunkel, January 1999, at http://www.ssa.gov/OACT/NOTES/n1990s.html. 24 SSA, Trust Fund FAQs, http://www.socialsecurity.gov/OACT/ProgData/fundFAQ.html. 25 The 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds, July 28, 2014, at http://www.socialsecurity.gov/OACT/TR/2014/tr2014.pdf. (Hereinafter cited as 2014 Annual Report of the Social Security Board of Trustees.) See Table III.A3 on page 34. 26 Status of the Social Security and Medicare Programs: A Summary of the 2014 Annual Reports, Social Security and Medicare Boards of Trustees, July 28, 2014, page 2, http://www.socialsecurity.gov/OACT/TRSUM/tr14summary.pdf. 27 Unpublished data from CBO showing projections for tax year 2014. For more information, see CRS Report RL32552, Social Security: Calculation and History of Taxing Benefits. c11173008 Congressional Research Service 4 Social Security Primer . 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 (2088).28 That is, Social Security will operate with annual cash-flow deficits. 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 2019. The trustees project that the trust funds will have a positive balance until 2033, and Social Security benefits scheduled under current law can be paid in full and on time until then (until the accumulated assets held by the trust funds are exhausted). Although the trust funds are projected to have a positive balance until 2033 on a combined basis, the OASI trust fund is projected to be exhausted in 2034, and the DI trust fund is projected to be exhausted in 2016. Under current law, DI benefits could not be paid in full and on time following DI trust fund exhaustion in 2016. The trustees state ... the DI Trust Fund reserves become depleted in 2016, at which time continuing income to the DI Trust Fund would be sufficient to pay 81 percent of DI benefits. Therefore, legislative action is needed as soon as possible to address the DI program’s financial imbalance. Lawmakers may consider responding to the impending DI Trust Fund reserve depletion as they did in 1994, solely by reallocating the payroll tax rate between OASI and DI. Such a response might serve to delay DI reforms and much needed corrections for OASDI as a whole. However, enactment of a more permanent solution could include a tax reallocation in the short-run.29 Over the long run, the trustees project that Social Security expenditures will exceed income by about 21% on average over the next 75 years. 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).30 At the end of 2014, the trust funds were credited with accumulated assets of $2.8 trillion. The trustees project that the trust fund balance will continue to grow over the next several years due to interest income, peaking at $2.9 trillion in current dollars ($2.6 trillion in constant 2014 dollars) at the end of 2019. Beginning in 2020, Social Security expenditures will exceed total income (tax revenues plus interest income) and the trust fund balance will begin to decline, until the accumulated trust fund assets are exhausted in 2033. To put the size of the trust fund balance into perspective, one can look at the trust fund ratio. The trust fund ratio represents trust fund assets at the beginning of a year as a percentage of costs for the year. In 2015, for example, the projected 28 Projections cited in this CRS report are based on the intermediate (or “best estimate”) assumptions of the 2014 Annual Report of the Social Security Board of Trustees and refer to the OASI and DI trust funds on a combined basis. For more information on the trust fund projections, see CRS Report RL33028, Social Security: The Trust Fund. 29 2014 Annual Report of the Social Security Board of Trustees, p. 4, http://www.socialsecurity.gov/OACT/TR/2014/ tr2014.pdf. In 1994, the reallocation of the payroll tax rate between the OASI and DI trust funds was part of the Social Security Domestic Employment Reform Act of 1994 (P.L. 103-387). For more information on the status of the DI trust fund, see CRS Report R43318, Social Security Disability Insurance (DI) Trust Fund: Background and Solvency Issues. 30 A wage-indexed benefit formula allows initial monthly benefits for successive groups of new beneficiaries to keep pace with increases in the standard of living. An annual COLA for benefits already in payment allows benefits for current beneficiaries to keep pace with increases in prices. c11173008 Congressional Research Service 5 Social Security Primer . trust fund ratio is 306% (assets held by the trust funds at the beginning of 2015 are projected to be 3.06 times greater than the cost of the program in 2015). The trustees project that the trust fund ratio will decline to 187% in 2023 and reach zero at the point of trust fund exhaustion in 2033.31 After trust fund exhaustion, the program would continue to operate with incoming Social Security receipts that are projected to be sufficient to pay 77% of benefits scheduled under current law in 2033 and 72% of scheduled benefits in 2088. Social Security does not have authority to borrow from the general fund of the Treasury. Therefore, the program cannot simply draw upon general revenues to make up the difference between incoming receipts and benefit payments when the program no longer has accumulated assets to draw upon. The Social Security Act does not state what would happen to the payment of benefits scheduled under current law in the event of Social Security trust fund exhaustion. Two possible scenarios are (1) the payment of full monthly benefits on a delayed schedule, or (2) the payment of partial (reduced) monthly benefits on time.32 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 current dollars) from 1984 to 2009. Beginning in 2010, however, the program began operating with annual cash-flow deficits, and the trustees project that Social Security tax revenues will remain below program expenditures each year throughout the 75-year projection period (2014-2088). When Social Security operates with a cash-flow deficit, the trust funds redeem more federal securities than the amount of current Social Security tax revenues, relying in part on accumulated trust fund assets to pay benefits and administrative expenses. Because the federal securities held by the trust funds are redeemed with general revenues, this results in increased spending for Social Security from the general fund. When there are no surplus governmental receipts, the federal government must raise the necessary funds by increasing taxes or other income; reducing other spending; borrowing from the public; or some combination of these measures. With respect to the program’s reliance on general revenues, it is important to note that Social Security does not have authority to borrow from the general fund of the Treasury under current law. Rather, the program relies 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 and interest income earned on trust fund investments. The program draws on those previously collected Social Security tax revenues and interest income (accumulated trust fund assets) when current Social Security tax revenues fall below current program expenditures. 31 2014 Annual Report of the Social Security Board of Trustees, Table IV.A3, p. 46, http://www.socialsecurity.gov/ OACT/TR/2014/tr2014.pdf. 32 For more information, see CRS Report RL33514, Social Security: What Would Happen If the Trust Funds Ran Out?, and CRS Report RL32822, Social Security Reform: Legal Analysis of Social Security Benefit Entitlement Issues. c11173008 Congressional Research Service 6 Social Security Primer . Social Security Reform Debate Social Security reform is an issue of ongoing interest to lawmakers. For some advocates of reform, the focus is on restoring long-range solvency to the trust funds. For others, the focus is on constraining the projected growth in spending for entitlement programs—including Social Security, Medicare, and Medicaid—in the context of broader efforts to reduce growing federal budget deficits. The Social Security reform debate reflects other policy objectives as well, such as improving the adequacy and equity of benefits,33 and different philosophical views about the role of the Social Security program and the federal government in providing retirement income. In recent years, the debate has reflected 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. In 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.34 More recently, there has been a focus among some lawmakers on proposals that would increase Social Security benefits, especially for certain groups such as women and older beneficiaries, and increase payroll taxes for higher-earners. 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).35 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). 33 Traditionally, one of the principles governing the Social Security program has been balancing the competing goals of social adequacy and individual equity. The social adequacy goal takes into account factors beyond a person’s payroll tax contributions in determining the appropriate level of benefits (factors such as providing a minimum standard of living). The individual equity goal takes into account the degree to which a person’s benefit level reflects his or her contributions to the system. 34 For more information, see CRS Report RL33544, Social Security Reform: Current Issues and Legislation. 35 The full retirement age is also called the normal retirement age (NRA). c11173008 Congressional Research Service 7 Social Security Primer . Specifically, workers born in 1938 or later are affected by the increase in the FRA (i.e., workers who become eligible for retirement benefits at age 62 in 2000 or later). The increase in the FRA will be fully phased-in for workers born in 1960 or later (i.e., workers 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.36 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, 2015 Social Security/SSI/Medicare Information, February 9, 2015, available at http://www.socialsecurity.gov/legislation/2015%20Fact%20Sheet.pdf. Computation of a Social Security Retired-Worker Benefit Among other requirements, a worker generally needs 40 earnings credits (10 years of Social Security-covered employment) to be eligible for a Social Security retired-worker benefit.37 A worker’s initial monthly benefit is based on his or her highest 35 years of earnings in covered employment, which are indexed to historical wage growth (earnings through age 60 are indexed; earnings thereafter are counted at nominal value).38 The highest 35 years of indexed earnings are summed, and the total is divided by 420 months (35 years x 12 months = 420 months). The resulting amount is the worker’s average indexed monthly earnings (AIME). If a worker has fewer than 35 years of earnings in covered employment, years with no earnings are entered as zeroes 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 36 For more information, see CRS Report R41962, The Social Security Retirement Age: In Brief. A worker may earn up to four earnings credits per calendar year. In 2015, a worker earns one credit for each $1,220 of covered earnings, up to a maximum of four credits for covered earnings of $4,880 or more. Earnings credits are also called quarters of coverage. 38 Indexing past earnings brings them up to near-current wage levels. 37 c11173008 Congressional Research Service 8 Social Security Primer . amounts known as bend points. In 2015, the bend points are $826 and $4,980.39 Three progressive replacement factors—90%, 32%, and 15%—are applied to the three brackets of AIME.40 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 2015, the PIA is determined as shown in the example in Table 2. Table 2. Computation of a Worker’s Primary Insurance Amount (PIA) in 2015 Based on an Illustrative AIME of $5,000 Replacement Factors Three Brackets of AIME 90% first $826 of AIME, plus 32% AIME over $826 and through $4,980, plus 15% AIME over $4,980 PIA for Worker with an Illustrative AIME of $5,000 Total: Worker’s PIA (rounded down) $743.40 (90% x $826) $1,329.28 (32% x $4,154) $3.00 (15% x $20) $2,075.60 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.41 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. Retired-worker 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% per year. For each month of benefit entitlement before the FRA in excess of 36 months, retirement benefits are reduced by five-twelfths of 1% (or 0.0042), for a reduction of 5% per year.42 39 The bend points in the benefit formula are indexed to average wage growth under current law. The replacement factors in the benefit formula are fixed under current law. 41 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. 42 The early retirement reduction for spousal benefits is different. Spousal benefits claimed before the FRA are reduced by 25/36 of 1% (or 0.0069) for each month of entitlement before the FRA, up to 36 months, and by five-twelfths of 1% (or 0.0042) for each month of entitlement before the FRA in excess of 36 months. The reduction is applied to the base spousal benefit, which is 50% of the worker’s PIA. The spousal benefit is not reduced for entitlement before the FRA if the spouse is caring for a qualifying child. The early retirement reduction also differs for widow(er)’s benefits. The maximum reduction for widow(er)’s benefits claimed before the FRA is equal to 28.5% of the deceased worker’s PIA. Alternatively, if a widow(er) claims benefits at the FRA, his or her benefits are reduced if the deceased worker claimed benefits before the FRA and therefore was receiving a reduced benefit. Under the widow(er)’s limit provision, the widow(er)’s benefit is limited to the higher of (1) the benefit the deceased worker would be receiving if he or she were (continued...) 40 c11173008 Congressional Research Service 9 Social Security Primer . Workers who delay filing for benefits until after the FRA receive a delayed retirement credit (DRC). The DRC applies to the period that begins with the month the worker attains the FRA and ends with the month before he or she attains the age of 70. The DRC is 8% per year for workers born in 1943 or later (i.e., workers who attain the age of 62 in 2005 or later). 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.43 Other Adjustments to Benefits (Including GPO and WEP) Other benefit adjustments may apply, such as those related to simultaneous entitlement to more than one type of Social Security benefit. Under the dual entitlement rule, for example, a Social Security spousal benefit is reduced if the person also receives a Social Security benefit based on his or her own work in covered employment (a retired-worker or disabled-worker benefit). Similarly, under the government pension offset (GPO), a Social Security spousal benefit is reduced if the person receives a non-covered pension based on his or her own work in noncovered employment. Under the windfall elimination provision (WEP), a modified benefit formula is used to compute a worker’s Social Security benefit (resulting in a lower initial monthly benefit compared to the regular benefit formula) in certain cases when the person receives a noncovered pension based on other work performed in non-covered employment.44 Under the retirement earnings test (RET), the Social Security benefit is reduced when a person is below the FRA and he or she has wage or salary income above an annual dollar threshold (an annual exempt amount).45 Under the Social Security maximum family benefit provision, benefits payable to each family member (excluding the worker) may be reduced to keep the total benefits payable to the 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 that is expected to last at least 12 months or result in death. Generally, the worker (...continued) still alive or (2) 82.5% of the deceased worker’s PIA. In this case, the maximum reduction applied to the widow(er)’s benefit is equal to 17.5% of the deceased worker’s PIA. 43 For more information, see CRS Report R43542, How Social Security Benefits Are Computed: In Brief. 44 For more information on these provisions, see the following CRS documents: CRS Report RL32453, Social Security: The Government Pension Offset (GPO); CRS Report 98-35, Social Security: The Windfall Elimination Provision (WEP); and CRS Report IF00035, Social Security: The Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) (In Focus). 45 For more information on the RET, see CRS Report R41242, Social Security Retirement Earnings Test: How Earnings Affect Benefits. c11173008 Congressional Research Service 10 Social Security Primer . must be unable to do any kind of substantial work that exists in the national economy, taking into account age, education, and work experience. As noted previously, a worker generally needs 40 earnings credits to qualify for a Social Security retired-worker benefit. A worker under the age of 62 can qualify for a Social Security disabled-worker benefit with fewer earnings credits. The number of earnings credits needed varies, depending on the age of the worker when he/she became disabled; however, a minimum of six earnings credits is needed. Similarly, while the worker’s highest 35 years of earnings are used to compute a retired-worker benefit, fewer years of earnings may be used to compute a disabled-worker benefit.46 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.47 Benefits for the Worker’s Family Members Social Security may be viewed by some as a program that provides benefits only to retired or disabled workers; however, about 19% of Social Security beneficiaries are the dependents and survivors of retired, disabled, or deceased workers.48 Social Security benefits are payable to the spouse, divorced spouse, or child of a retired or disabled worker. Benefits are also payable to the widow(er), divorced widow(er), child, or parent of a deceased worker. In addition, mother’s or father’s benefits are payable to a young widow(er) who is caring for a deceased worker’s child, if the child is under the age of 16 or disabled and entitled to benefits.49 Benefits payable to family members are equal to a specified percentage of the worker’s PIA, subject to a maximum family benefit. 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 a Social Security benefit based on his or her own work record, and other factors. 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).50 Maximum Family Benefit The total amount of Social Security benefits payable to a family based on a retired, disabled, or deceased worker’s record is capped by the maximum family benefit. The family maximum cannot be exceeded, regardless of the number of beneficiaries entitled to benefits on the worker’s record.51 If the sum of all benefits payable on the worker’s record exceeds the family maximum, 46 For more information, see CRS Report R43370, Social Security Disability Insurance (SSDI): Becoming Insured, Calculating Benefit Payments, and the Effect of Dropout Year Provisions. 47 For more information, see CRS Report RL32279, Primer on Disability Benefits: Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI). 48 SSA, Monthly Statistical Snapshot, December 2014, Table 2. See the latest edition of the Monthly Statistical Snapshot at http://www.socialsecurity.gov/policy/docs/quickfacts/stat_snapshot/index.html. 49 To receive mother’s/father’s benefits, the person must be unmarried and must not be entitled to widow(er)’s benefits. 50 For related information, see CRS Report RS22294, Social Security Survivors Benefits. 51 Social Security Act, Title II, §203. c11173008 Congressional Research Service 11 Social Security Primer . the benefit payable to each dependent or survivor is reduced in equal proportion to bring the total amount of benefits payable to the family within the limit. In the case of a retired or deceased worker, the maximum family benefit is determined by a formula and varies from 150% to 188% of the worker’s PIA. For the family of a worker who attains the age of 62 in 2015, or dies in 2015 before attaining the age of 62, the total amount of benefits payable to the family is limited to • 150% of the first $1,056 of the worker’s PIA, plus • 272% of the worker’s PIA over $1,056 and through $1,524, plus • 134% of the worker’s PIA over $1,524 and through $1,987, plus • 175% of the worker’s PIA over $1,987. The dollar amounts in the maximum family benefit formula ($1,056, $1,524, and $1,987 in 2015) are indexed to average wage growth, as in the regular benefit formula. In the case of a disabled worker, the maximum family benefit is equal to 85% of the worker’s AIME; however, the family maximum cannot be less than 100% or more than 150% of the worker’s PIA.52 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 the child must be entitled to benefits. The worker on whose record benefits are based must have claimed benefits. Divorced Spouse At least age 62 (The divorced individual must have been married to the worker for at least 10 years before the divorce became final.) Must be unmarried 50% of worker’s PIA A divorced spouse may receive benefits based on the worker’s record if the worker is eligible for (not necessarily receiving) benefits and the divorce has been final for at least 2 years. If divorced less than 2 years, the worker on whose record benefits are based must be receiving benefits. Note: A divorced spouse who is under the age of 62 is not eligible for spousal benefits even if he/she is caring for the child of a retired or disabled worker. 52 Benefits for a divorced beneficiary are not taken into account for purposes of the family maximum. SSA, Program Operations Manual System (POMS), Section RS 00615.682, “Family Benefits Where a Divorced Spouse or a Surviving Divorced Spouse is Entitled,” available at https://secure.ssa.gov/apps10/poms.nsf/lnx/0300615682. c11173008 Congressional Research Service 12 Social Security Primer . Basis for Entitlement Basic Eligibility Requirements Aged Widow(er) & At least age 60 Divorced Aged Widow(er) Must be unmarried (unless the marriage occurred after attainment of age 60) (The divorced individual must have been married to the worker for at least 10 years before the divorce became final.) Basic Benefit Amount Before Any Applicable Adjustments 100% of worker’s PIA Disabled Widow(er) & At least age 50 (ages 50-59) 71.5% of worker’s PIA Divorced Disabled Widow(er) Must be unmarried (unless the marriage occurred after attainment of age 50) Disabled widow(er)s and divorced disabled widow(er)s ages 50-59 receive the same rate of reduction set for widow(er)s at age 60 (28.5% of the worker’s PIA), regardless of their age at the time of entitlement. (The divorced individual must have been married to the worker for at least 10 years before the divorce became final.) The qualifying disability must have occurred (1) before or within seven years of the worker’s death; (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). Widowed Mother or Father (Young Widow(er) with Child) Surviving spouse of any age who is caring for the deceased worker’s child. The child must be under the age of 16 or disabled, and the child must be entitled to benefits. 75% of deceased worker’s PIA Must be unmarried Must not be entitled to widow(er)’s benefits Note: In the case of a surviving divorced parent, the child must be his or her natural or legally adopted child. The 10-year marriage requirement that applies to divorced spouses under other circumstances does not apply. c11173008 Congressional Research Service 13 Social Security Primer . Basis for Entitlement Child Basic Eligibility Requirements Basic Benefit Amount Before Any Applicable Adjustments A dependent, unmarried child of a retired, disabled, or deceased worker. 50% of worker’s PIA for child of a retired or disabled worker The child must be 75% of deceased worker’s PIA for child of a deceased worker (1) under the age of 18; (2) a full-time elementary or secondary student under the age of 19; or (3) a disabled person aged 18 or older whose disability began before age 22. The term child refers to a biological child, adopted child, stepchild, or in some cases grandchild, of the worker. Dependent Parent of a Deceased Worker At least age 62 Must not have married since the worker’s death 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 that continued until death, at the beginning of the period of disability). 82.5% of deceased worker’s PIA if one parent is entitled to benefits 75% of deceased worker’s PIA (for each parent) if two parents are entitled to benefits Source: Congressional Research Service. Notes: The family relationship requirement for entitlement to benefits based on the worker’s record may be met in alternative ways. For example, the relationship requirement can be met if, under state law as interpreted by the courts of the state, the applicant would be able to inherit a share of the worker’s personal property if the worker were to die without leaving a will. 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 payable to each family member (excluding the worker) on a proportional basis. In the case of a retired or deceased worker, the maximum family benefit varies from 150% to 188% of the worker’s PIA. In the case of a disabled worker, the maximum family benefit is equal to 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 December 2014, there were 59 million Social Security beneficiaries. As shown in Table 4, retired-worker and disabled-worker beneficiaries accounted for 81.3% of the beneficiary population. The largest single category of beneficiaries was retired workers (66.1%), with an average monthly benefit of about $1,329. The second-largest category was disabled workers (15.2%), with an average monthly benefit of about $1,165. Family members of retired, disabled, or deceased workers accounted for the remainder of the beneficiary population (18.7%). Table 4 provides a detailed breakdown of the Social Security beneficiary population in December 2014. c11173008 Congressional Research Service 14 Social Security Primer . Table 4. Social Security Beneficiaries, by Type, December 2014 Type of Beneficiary Number of Beneficiaries (in thousands) Percentage of All Beneficiaries Total Monthly Benefits ($ in millions) Average Monthly Benefit (in dollars) All beneficiaries 59,007 100.0 71,693 1,214.99 Old-Age and Survivors Insurance 48,076 81.5 60,573 1,259.94 Retirement benefits 41,948 71.1 53,789 1,282.27 - Retired workers 39,009 66.1 51,826 1,328.58 - Spouses of retired workers 2,303 3.9 1,551 673.26 - Children of retired workers 635 1.1 411 647.38 Survivor benefits 6,128 10.4 6,785 1,107.09 - Children of deceased workers 1,892 3.2 1,572 830.73 - Widowed mothers and fathers 143 0.2 133 934.90 3,835 6.5 4,891 1,275.61 258 0.4 187 724.07 1 a 1 1,120.76 10,931 18.5 11,120 1,017.30 8,955 15.2 10,436 1,165.39 - Nondisabled widow(er)s - Disabled widow(er)s - Parents of deceased workers Disability Insurance - Disabled workers - Spouses of disabled workers 149 0.3 47 314.53 - Children of disabled workers 1,828 3.1 638 349.01 Source: Table is reproduced from SSA, Monthly Statistical Snapshot, December 2014, Table 2. See the latest edition of the Monthly Statistical Snapshot at http://www.socialsecurity.gov/policy/docs/quickfacts/stat_snapshot/ index.html. a. Indicates a value less than 0.05%. Author Contact Information Dawn Nuschler Specialist in Income Security dnuschler@crs.loc.gov, 7-6283 Key Policy Staff c11173008 Area of Expertise Name Phone E-mail Social Security Dawn Nuschler 7-6283 dnuschler@crs.loc.gov Social Security Noah Meyerson 7-4681 nmeyerson@crs.loc.gov Social Security Disability Insurance William Morton 7-9453 wmorton@crs.loc.gov Social Security Disability Insurance Scott Szymendera 7-0014 sszymendera@crs.loc.gov Congressional Research Service 15