Presentation Transcript

1. SOCIAL SECURITYWhere it’s been, where it is, what you should know

   FPA of Greater Rochester June 11, 2014 Presented by Theodore J Sarenski, CPA/PFS, CFP, AEP CEO of Blue Ocean Strategic Capital, LLC, Syracuse, NY
2. Speaker Biography Ted’s over 35 years experience as a CPA and over 20 years as a Financial Planner serve as the backdrop for the assembly of the Blue Ocean staff of highly educated, experienced people who form the team that deliver wealth management services to Central New York. His extensive experience in individual taxation and estate planning bring a dimension to wealth management not found in most other asset management firms at the local level. Ted is recognized locally and nationally as an expert providing financial planning advice. He currently appears on WSTM-3, Syracuse’s NBC affiliate, taking viewers’ calls and offering planning concepts to viewers. Ted appears on the PBS affiliate in Syracuse as a permanent guest host of the program “Financial Fitness” which airs live for one hour every Thursday at 8 PM EST. He received the 2014 Distinguished Service Award by the American Institute of Certified Public Accountants (AICPA) Personal Financial Planning Division for contributions to further financial planning within the CPA community, industry-related publications and speaking engagements across the country. Ted authored articles on financial planning that have appeared in The Journal of Accountancy, The CPA Journal, The Journal of Taxation and the AICPA Wealth Management Insider. He authored a CPAs Guide to Social Security for the American Institute of CPAs in 2011. He has been interviewed and quoted in many publications including: USA Today, The Wall Street Journal, Consumer Reports, The Christian Science Monitor, Investment News, Kiplinger Personal Finance Report, Financial Planning Magazine (cover photo February 2013), Accounting Today and The Practical Accountant. Since 2005, Ted has been interviewed by hundreds of Radio Stations across the country on a variety of financial planning and income tax topics. Ted was interviewed for a 45 minute segment of NPR on the topic of retirement and Social Security in 2009.
3. We can never insure 100% of the population against 100% of the hazards and vicissitudes of life but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty ridden old age.
4. SOCIAL SECURITY HISTORY Social Security Act Signed August 14, 1935 First Modification – 1939 Added spouse and minor children benefit to retired worker Added survivor benefit First COLA adjustments – 1950 and 1952 1954 Amendment Added freezing worker’s record during disability 1956 Amendment Added disability benefits for those age 50 – 65 Added armed forces personnel to withholdings and benefits
5. Who is This?
6. Who is this?
7. SOCIAL SECURITY HISTORY 1961 Amendment Reduced retirement age to 62 for men 1965 Amendment Added Medicare on June 30th 1972 Amendment Automatic COLA adjustments beginning in 1975 Increased benefits to those waiting to age 65 Automatic increases in the amount of earnings subject to tax SSI added to SSA’s purview 1975 Treasury Department Report Payments will exceed collections by 1979
8. SOCIAL SECURITY HISTORY 1977 Amendment Increased tax rate Reduced benefits (notch babies) Automatic adjustment in the amount of earnings subject now independent of COLA 1983 Greenspan Commission and Amendment Taxation of Social Security Benefits Added federal employees to withholdings and benefits Increased Full Retirement Age (FRA) to 67 twenty years in the future 2000 Amendment Lowered to age 65 the ability to earn whatever and collect full benefits
9. Who is this?
10. Remember Her?
11. Look Closely!
12. Look Closely!
13. Annual Report of the Board of Trustees – May 31, 2013 For the 75-year projection period, the present value of UNFUNDED obligations is $9.6 Trillion Reserves for Social Security will be fully depleted in 2033 Once depleted, annual Social Security receipts would be sufficient to pay 77% of scheduled benefits
14. Annual Report of the Board of Trustees – May 31, 2013 Reserves for Social Security Disability will be fully depleted in 2016 Once depleted, annual Social Security disability receipts would be sufficient to pay 80% of Disability benefits To remain solvent – increase revenues from payroll tax by going to 15.06% from its current 12.4% OR reduce benefits for those eligible to start benefits in 2013 and the future by 19.8%
15. A Peek Inside the Social Security Trust Fund
16. Facts and Figures - 2014 Social Security maximum taxable income - $117,000 Medicare maximum taxable income – no limit Earnings exempt amount before penalty of $1 of benefit for every $2 earned when under age 66 the entire year - $15,480 Earnings exempt amount before penalty of $1 of benefit for every $3 earned in the year you become age 66 - $41,400 Maximum monthly Social Security benefit - $2,642
17. Social Security Facts – From 2013 58 million people received benefits totaling $816 Billion 39.9 million retirees and dependents – 74% 11.0 million disabled workers and dependents – 16% 6.2 million survivors – 10% Among the Elderly Social Security represents 50% or more of the income of: 53% of married couples 74% of unmarried persons Social Security represents 90% or more of the income of: 23% of married couples 46% of unmarried persons
18. Social Security Facts – From 2013 In 1940, life expectancy of a 65 year-old was almost 14 years – today it is more than 20 years By 2033, the number of Americans 62 and over will be 77.4 million – today 45.1 million By 2033, there will be 2.1 worker for every recipient – today it is 2.8 workers for every recipient Today – 51% of the workforce has no private pension coverage Today – 34% of the workforce has no savings set aside specifically for retirement
19. Why Does Social Security Matter? A 66 year old individual. The individual receives $1,250 per month of Social Security benefits with the benefits increasing each year using a 2% annual COLA. A pool of after-tax savings of $500,000 which is earning 7% annually. The individual spends $3,215 per month and increases the spending annually at a 3.5% inflation rate.
20. Why Does Social Security Matter?
21. Simpson-Bowles Commission Increase taxable Maximum to 90% of all income (example, 2015 maximum taxable income would be $153,000). Use a different inflation rate to slow the COLA adjustments. Raise the retirement age to 68 in 2050 and 69 in 2075.
22. SOCIAL SECURITY STATEMENTS – or – HOW DO THEY COMPUTE THAT NUMBER? First step is to compute your Average Indexed Monthly Earnings (AIME) Multiply your earnings or the Maximum Taxable Amount, whichever is greater, for each year since 1950 by the index amount for that year. Add up the best 35 years indexed earnings Divide by 420 to get your AIME Second step is to compute your Primary Insurance Amount (PIA) Take 90% of the first $816 of AIME, plus 32% of the next $4,101 of AIME, plus 15% of AIME in excess of $4,917 This calculation is done for the year you reach age 62, whether you retire or not, and then indexed for inflation from that year.
23. WHEN DO YOU ADVISE TO BEGIN TAKING SOCIAL SECURITY BENEFITS?
24. Difference in Monthly Benefit – No Time Value or COLA
25. Basics – Breakeven Point Breakeven point if you start at age 62 rather than waiting to age 66 – Age 77, when waiting would have been better. Breakeven point if you start at age 62 rather than waiting to age 70 – Age 80, when waiting would have been better. Breakeven point if you start at age 66 rather than waiting to age 70 – Age 82, when waiting would have been better.
26. No Wage Earner Timeline
27. Significant Lower Wage Earner Timeline
28. Not Significant Lower Wage Earner Timeline
29. Factors that Impact Decisions Health Family history Need Earnings potential from age 62 to FRA to age 70 Marital status Other retirement savings
30. Other Ideas For single people – a recipient can suspend anytime between 66 and 70 to earn the 8% per year increase even if they began benefits at age 62 Example: An individual with benefit of $750 at age 62 and $1,000 at age 66 Start at age 62, suspend from 67 to 70 and start again, using a 2% COLA Age 63 64656667686970 Ben. 765 780 796 812 0 00 1081
31. Other Ideas Higher Earner younger? Start own benefit at 62 to allow lower earning older spouse to start spousal benefit only at age 66 and switch at age 70 for his/her own benefit if it will be higher than the spousal benefit. Higher earning spouse continues to work, and if earning about $20,000 or more, will pay all benefits back. At age 66, SS benefit will be the age 66 benefit as if he/she had never started. Can then begin own benefits at age 66 or suspend to age 70.
32. Other Ideas Medicare Traps!! If you have suspended Social Security benefits at or after age 66 and are on Medicare Part B, pay the premium out of your own pocket. The gov’t will pay for your Medicare if you have suspended benefits but then – THEY WILL NOT CREDIT YOU WITH THE DELAYED RETIREMENT CREDITS OF 8% PER YEAR! Medicare Part B premium increases are limited to the increase in Social Security benefits if you are collecting benefits but not if you have suspended benefits! (for those single under $85,000 and MFJ under $170,000)
33. Other Ideas Marry right! Need to be married for 1 (one) year in order to collect spousal benefits from your spouse’s work record. Never worked a day in your life? Marry a high wage earner and collect ½ of that wage earner’s benefit as a spousal benefit and the whole benefit if they die. (not caused by you of course) Marrying a low wage earner is like marrying a person with large credit card debt; you will never get ahead or catch up. Credit questions and wage history questions are now suggested for those dating when age 50 or over.
34. Other Ideas If adventurous! Assume a married couple are both age 66. Both husband and wife cannot file and suspend and both apply for spousal benefits only. One must actually file and suspend (or collect) and the other can collect spousal benefits. If both are delaying their own benefit to age 70 than only one spousal benefit will be collected between age 66 and 70. GET DIVORCED! Divorced spouses can each file for “spousal benefit only” on the work record of their ex-spouse and wait to collect their own benefit until age 70. Keep living together and now the household has 2 (two) spousal benefits as income coming in.
35. Other Ideas If Adventurous 2! Assume two single people age 66 who would each like to wait to age 70 to get the highest benefit possible on their own earning’s record. Between age 66 and 70 neither would collect a dime from Social Security. GET MARRIED! Have a marriage of convenience at age 65 (need to be married one year to get spousal benefits). Have the lower of the two earners apply for spousal benefits only at age 66 deferring his/her own benefit and the higher earner of the two file and suspend. Share the one spousal benefits check down the middle for 4 years. Both collect at age 70 on each owns work record; stay together, stay married, get divorced; who cares anymore!
36. Representative Payee An individual or organization appointed by SSA to receive the benefits for someone who cannot manage his/her money to pay current and foreseeable needs of the beneficiary and properly save the net for future needs MUST keep records of expenses, and, when SSA asks (and they will) must provide an accounting Power-of-Attorney (POA) or joint bank account not the same thing
37. Representative Payee File form SSA-11 – Request to be Selected as Payee. The form needs to be completed in a face to face interview with SSA and you will need documents to prove your identity. Individuals are not allowed to charge a fee for being a Representative Payee. If the beneficiary is institutionalized the payee must first pay for customary charges, then current maintenance, then remainder can be used for dependent spouse, child or parent living at home.
38. Survivor Benefit A Widow or Widower is allowed to begin claiming a survivor benefit at age 60 (assuming their own benefit is lower). To advise whether to start at 60 or not is a matter of the relative values of the Social Security Benefits of the survivor and the deceased. Starting the Survivor Benefit at age 60 is a further discount than age 62 (25% discount) of what would be received at current full retirement age of 66. it will be 71.5% of the age 66 benefit.
39. Survivor Benefit Unless circumstances of the client are such that this is the only money they will have for income, never start at age 60 because of the additional discount applied. Benefits based on a deceased worker who had not yet begun benefits do not get Delayed Retirement Credits after FRA If the worker was already receiving benefits before death, the survivor benefit will be based on that amount at that age Limited if the worker began benefits prior to FRA Increased by the Delayed Retirement Credits if the worker began benefits after FRA
40. Repay and Reapply Withdraw your Social Security application and repay all of the benefits received in one lump sum, no interest! (Including spousal and/or children’s benefits) As of December 8, 2010, only allowed within 1 year of beginning benefits and only once per lifetime. Why? Maybe started Social Security at age 62 and then found your dream job Maybe started at age 66 and then came in to money and want to go back and get 8% per year increase for waiting Survivor can do this for a worker who died!
41. Criminals’ Corner Lose your Social Security for a federal conviction for subversive activities Felony related impairments – No Social Security Disability If convicted of the felonious and intentional homicide of the worker- you cannot get the lump sum death benefit NOR are you entitled to benefits on the deceased’s Social Security record
42. Criminals’ Corner The same for minors causing the death of their parent – No survivor benefits available No Social Security Benefits while confined in jail, prison or certain other public institutions for the commission of a crime SS Identity Theft – 2 year mandatory imprisonment for knowingly using, possessing or transferring SS numbers without authority
43. Other Issues: Disability Benefits Qualify if you can’t work due to a medical condition that is expected to last at least one year or result in death. Must meet 2 earnings tests: Recent work test Duration of work test Over 200 compassionate Allowances – get benefits within 2 weeks of application http//www.ssa.gov/compassionateallowances/conditions.htm
44. Other Issues: Disability Benefits Family Maximum for SS Disability Benefits 85% of the worker’s Average Indexed Monthly Earnings (AIME) HOWEVER – it cannot be less than the worker’s Primary Insurance Amount (PIA) nor more than 150% of the PIA Example: a worker’s AIME is $1,800. The worker would receive a disability payment of $1,020.80 on his/her own. 85% of AIME is $1,530; 150% of PIA is $1,531.20 ($1020.80 X 150%). Therefore, spouse and children could receive the additional $509.20. ($1,530 - $1020.80) Eligible people include: Spouse (85%) Children (50%)
45. Other Issues: Windfall Eliminations Provision Affects any worker who earned a pension in a job in which they did not pay Social Security taxes and also worked in a job that qualifies them for Social Security benefits. The percentage of the first bend point of the AIME calculation is reduced from 90% to 40% but the Social Security benefit cannot be reduced by more than ½ of such pension received. Modified if the person has 21 to 30 years of substantial employment in the job that qualifies them for Social Security benefits.
46. Other Issues: Windfall Eliminations Provision Section 218 of the Social Security Law What does it really mean? The first bend point is $816 for 2014. Reducing the percentage applied to the first bend point from 90% to 40% means a 50% reduction on the 1st $816; thus, a reduction in Social Security benefit of $408 per month. The $408 would be the reduction in Social Security monthly benefit as long as the pension being received from the employment which did not pay into the Social Security system was at least $816 per month since the reduction cannot exceed 50% of said pension.
47. Other Issues: Government Pension Offset Affects federal employees hired before 1984 who continued to opt out of the Social Security system. Spousal or widow/widower Social Security benefit is reduced by 2/3 of the government pension being received by the individual. Only the government employee is affected, not the non-government employee spouse.
48. Other Issues: Government Pension Offset Example Assume a government worker is married to an individual who is going to receive the maximum Social Security monthly benefit in 2014 of $2,642 The government worker’s pension is going to be $1,800 per month 2/3 of the $1,800 is $1,200. A spousal benefit at FRA would be ½ of the $2,642 or $1,321. Therefore: the spousal benefit that would be received by the federal employee would be $121. ($1,321 - $1,200)
49. Other Issues: Divorce Married for at least 10 years Been divorced for at least 2 years Ex-spouse signing up for benefits is not a requirement Not re-married before age 60, UNLESS Subsequent marriage ended in divorce Subsequent marriage ended in death (not caused by survivor
50. Other Issues: Death (Survivor) Benefits Lump sum death benefit - $255 Benefit based on the insured worker’s PIA at date of death Eligible people include: Widow or widower – Age 60 (100%) OR any age (75%) if caring for the deceased’s child under age 16 or disabled Surviving divorced spouse – (happiest person) (100%) Unmarried children – under age 18 or up to 19 if still in high school (75%) Dependent parents – 62 or older who were dependent on the deceased for more than ½ of their support (2 – 75% each; 1-82.5%)
51. Other Issues: Death (Survivor) Benefits Family benefits with a family maximum limit The maximum family benefit is computed using a 4-tier formula instead of the usual 3-tier formula. When hitting the maximum family benefit, each beneficiary is reduced proportionately. 150% of the first $1,042 of the worker’s PIA 272% of the worker’s PIA over $1,042 up to $1,505 134% of the worker’s PIA over $1,505 up to $1,962 175% of the worker’s PIA over $1,962
52. Other Miscellaneous Social Security Issues Social Security is exempt from creditors Social Security CAN be garnished for child support and alimony and IRS can levy for taxes owed and unpaid student loans Totalization agreement with 21 countries (most European countries, Australia, Japan, South Korea, Canada and Chile) Eliminates dual coverage and taxation Avoid situations where workers lose benefits working in two different countries Increase benefit portability
53. WHO OWES INCOME TAXES ON SOCIAL SECURITY BENEFITS 50%85% Single or Head-of-Household taxpayer $25,000 $34,000 Married Filing Joint taxpayer $32,000 $44,000 Married Filing Separate taxpayer has a zero threshold for Taxation of Social Security benefits
54. Income Planning Issues: WHO OWES INCOME TAXES ON SOCIAL SECURITY BENEFITS Tax Planning Ideas: Start distributions from IRAs before age 70 ½ to reduce IRA, wait to age 70 for Social Security to get 8% per year Convert some Deductible IRAs to Roth IRAs Have fixed income investments inside your IRAs and have equity investments in your after tax accounts Pay Capital Gains tax today on appreciated property before you start collecting Social Security For long-term non-IRA investments consider using tax-deferred annuities
55. MEDICARE PART B – NEW INCREASED PREMIUMS
56. MEDICARE PART D – PRESCRIPTION DRUG BENEFIT 2014 Deductibles, Coverages and Co-Pays:
57. Additional Benefits for Veterans Dependency and Indemnity Compensation (DIC) Disability Benefits – Service Related Death Benefits – Service Connected Pension, Disability and Death Benefits – Not Service Connected