©2015, College for Financial Planning, all rights reserved.

Session 2Fundamentals of Social Security

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits

Session DetailsModule 1Chapter(s)

4

LOs 1-5 Identify and categorize basic provisions of an OASDI program: retirement, survivorship, and disability.

1-7 Analyze a given situation to calculate the taxation of Social Security benefits.

2-2

OASDIOld Age, Survivors, andDisability Insurance has three main components:1.Retirement

(old age)2.Disability

(disability of wage earner)

3.Survivorship (death of wage earner)

2-3

Key Terms in OASDI Programs

• Quarter of coverage ($1,220 in 2015)• Currently insured/Fully insured• Average Indexed Monthly Earnings (AIME)• Full retirement age (FRA)• Primary Insurance Amount (PIA)• Spousal benefit• Benefit reductions due to age • Benefit reductions due to earnings• Events that trigger the end of benefits• Divorced spouse coverage (married 10

years)2-4

Full Retirement AgeBorn Full Retirement Age Age 62 BenefitBefore 1938

65 80%

1938-1942 65 plus monthly adjustment

75-80%

1943-1954 66 75%1955-1959 66 plus monthly

adjustment70-75%

After 1960 67 70%

2-5

Benefit Reductions Due to Earnings

Age You will lose Amount (2015)

62 to year of FRA$1 in benefits for

every $2 of earnings above

$15,720

Year you reach FRA

$1 in benefits for every $3 of earnings

above$41,880

After reaching FRA No benefit reduction Unlimited

2-6

Retirement Earnings Test Example

Item AmountTotal Social Security benefits (75% of maximum FRA amount)

$23,967

Earnings $41,560Social Security earnings limit (2015)

$15,720

Excess earnings $25,840Reduction in Social Security benefits (50% of excess earnings)

$12,920

Net Social Security benefits $ 11,047

2-7

Qualifying for Social Security Disability Benefits

1. Disabled worker must be fully insured (at least 40 quarters) and

2. Have worked for at least 20 of the last 40 quarters

2-8

Qualifying for Social Security Survivor Benefits

1. Deceased worker must have been either fully insured (40 quarters) or

2. Currently insured (at least 6 of last 13 quarters)

2-9

Social Security Benefit Review

Benefits will be paid to: Retirement Disability DeathWorker, Under FRA Reduced*

PIA100% of PIA N/A

Worker, FRA & Over 100% of PIA Disability benefits cease; retirement

benefits begin

N/A

Spouse, age 60 or 61 No benefit No benefit 100% of PIA, reduced

Spouse, age 62 to FRA 50% of PIA, reduced 100% of PIA,

reducedSpouse, FRA or older 50% of PIA 100% of PIA Spouse, any age, caring for child under age 16 or disabled

50% of PIA 75% of PIA, reduced (worker

was currently insured)

Unmarried child under age 18 (19 if in high school) or any age if disabled

50% of PIA (subject to family maximum)

75% of PIA, reduced (worker

was currently insured)

2-10

Johnson Family Example• Robert Johnson died at

age 35. Survivors are:o Wife, Jane (age 35).o Daughter, Juli (age

6).o Son, Bobby (age 3).

• His PIA is $1,200.• Maximum family

benefit is $2,250.

2-11

Family Limits

Juli’s Benefit, 75% of PIA Reduced to $750

Bobby’s Benefit, 75% of PIA Reduced to $750

Jane’s Benefit, 75% of PIA, Reduced to $750 Widow(er)’s Blackout Period* Jane’s SS =

71.5%† PIA

*If widow(er) is disabled within seven years of spouse’s death. Social Security payments may begin at age 50.† If benefits begin at 60. 71.5% PIA; at 62.75% PIA: at 65, 100% PIA.

$1,200 PIA X 75% = $900

$900

$900

$2,700

$2,250 family max.

$450 reduction

35 40 45 47 48 50 55 60 65 66Jane’s Age

2-12

Income Tax on Social Security Benefits

Threshold income: joint filers

Threshold income: single filers

Percent of Social Security retirement benefit subject

to income taxLess than $32,000 Less than $25,000 None$32,000 to $44,000 $25,000 to $34,000 Up to 50%Greater than $44,000

Greater than $34,000

Up to 85%

2-13

Income Tax on Social Security Benefits

Thresholds are arrived at by using “provisional

income.” The main components of provisional

income are:• AGI• Tax-exempt interest income (muni bonds)• One-half of OASDI benefits

2-14

©2015, College for Financial Planning, all rights reserved.

Session 2End of Slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMRetirement Planning & Employee Benefits