Appendix 1: Social Security

1
Appendix 1 Social Security

• Last updated 9/6/03
• Some of the nformation for the following slides
  appears on
• http//www.socialsecurityinfo.com/current/current.
  htm

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Basic characteristics of OASDHI

• Presumptive need
• old enough? Retired?
• When combined with other assets/income, MOST
  retired should have some min std of living
• Individual equity vs social adequacy
• Self-financing, contributory system
• some minor exceptions for grandfathered benefits

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The Current Social Security Benefit Computation

• The following is the way one would calculate
  Social Security Benefits today
• Find the Normal Retirement Age.
• Calculate the Average Indexed Monthly Earnings
  (AIME).
• Calculate the Primary Insurance Amount (PIA).
  After doing that, make adjustments for early or
  late retirement and cost of living adjustments
  (COLA).
• Calculate any spouse's benefits.

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Do You Want To Know How Much Money You Will Get
From Social Security

• The above four steps is an over simplification.
  The purpose of presenting those steps is to give
  you an idea how your benefit amount will be
  arrived at. If your question is more along the
  lines of "What will my benefits be?" go to the
  Social Security Administration's PEBES web page.

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limitations

• The computation described here will cover most
  but not all situations. The situations that this
  computation will not work for are as follows
• This computation works when the worker and the
  spouse are born after 1921.
• This method is for retirement benefits. It does
  not cover disability or death benefits.
• To be covered one must work 40 quarters (10
  years). If you have not worked 40 or more
  quarters, this computation will not be accurate.

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Step 1 -- Determine The Normal Retirement Age

• The earliest date that one can receive Social
  Security retirement benefits is generally the
  first of the month after turning 62 years old.
• The Normal Retirement Age varies between 65 and
  67 years old depending on the year of birth.
• Retiring before the Normal Retirement age will
  result in lower monthly Social Security
  retirement benefits.
• Retiring after the Normal Retirement Age will
  result in increased Social Security monthly
  retirement benefits due to a increased multiplier
  of the Primary Insurance Amount (PIA).
• The multiplier of the Primary Insurance Amount
  stops increasing if one works past age 70.

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Normal Retirement Age
Intermediate years 2 months for every year
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Step 2 - Calculate The Average Indexed Monthly
Earnings (AIME)

• The AIME is earnings indexed for inflation for a
  specific number of years divided by the number of
  months in those years.
• The number of years is generally 35.
• The earnings used in this calculation are
  earnings which are subject to Social Security
  tax.
• A specific year's wages is then adjusted for
  inflation by multiplying that year's Social
  Security earnings by the ratio of base year
  average wages divided by average wages for that
  specific year.
• The base year is the year in which the worker
  turns 60.
• The inflation adjusted wages for the best 35
  years are totaled.
• That wage total is then divided by 420 months (35
  yrs x 12 months per year).

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Some observations about the AIME calculations

• The wage inflation factor is revised each year by
  the Social Security Administration.
• Since the maximum earnings subject to Social
  Security tax has increased at a faster pace than
  inflation, if the worker has worked more than 35
  years, generally, the more current years earnings
  will be used for the AIME calculation.
• If the worker or spouse has worked less than 35
  years, that person will be penalized in that
  total indexed wages will be divided by 420 months
  even if that person worked fewer than 420 months.
  
• If one is inclined to work past their 70th
  birthday, those earnings may help to increase
  Social Security benefits.

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Step 3 -- Calculate The Primary Insurance Amount
(PIA)

• The Primary Insurance Amount is the retirement
  benefit before adjustments for post-retirement
  inflation, retiring before the Normal Retirement
  Age or retiring after Normal Retirement Age but
  before age 70.
• That formula is determined in such a way that
  those who paid more Social Security tax will
  receive a higher benefit.
• However, there is a certain bias built in for
  lower earning workers.

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The Primary Insurance Amount Computation

• These are the steps to compute the PIA
• Multiply by .90 the lower of the low bend point,
  505 in 1999, or your AIME.
• Determine the lower of the high bend point,
  3,043 in 1999, or your AIME.
• Subtract the low bend point from the number
  determined in step 2. If the difference is less
  than zero, use zero.
• Multiply to amount from step 3 by .32.
• If your AIME is greater than the high bend point,
  subtract the high bend point amount from your
  AIME otherwise, use zero for your step 5 amount.
  
• Multiply the step 5 amount by .15.
• Your PIA is the total of the amounts from steps
  1, 4 and 6.
• The bend points usually change each year. You
  would use the ones that are for the first year
  when you could take your Social Security benefits
  early. Currently, that year is the year in which
  you turn 62.

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Step 4 - Retirement Benefits For A Spouse

• In general, the spouse's Social Security
  retirement benefits should be the larger of the
  spouse's retirement benefits based on the
  spouse's earnings or 50 of the worker's
  retirement benefit.
• A spouse may receive Social Security retirement
  benefits starting at age 62.
• However, Social Security monthly payments will be
  reduced if a spouse starts taking benefits before
  their normal retirement age.

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Wage Limits for 2003

• Maximum annual wage subject to Social Security
  tax 87,000

14
Replacement ratios
Source 1999 Trustees Report, Table III. B5, and
Social Security Administration (SSA) Office of
Research, Evaluation and Statistics, Fast Facts
and Figures about Social Security, 1999, p. 1.
Based on 1999 earnings (estimated).
15
Percentage of total income
Source Social Security Administration, Office of
Research, Evaluation, and Statistics, Income of
the Aged Population 55 or Older, 1996,
Publication No. 13-11871, April 1998. Table
VI.B.5 p. 115.