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PRIMER ON THE SOCIAL SECURITY SYSTEM
This is to provide an overview of the Social Security system: How
you qualify; what benefits are available; taxability; and a look at
medicare, disability, and SSI.
Here are some interesting statistics: As of 1997, there were 53
million people collecting Social Security; 33 million were on
Medicare; and 94% of all employees of record are paying social
security and medicare tax from their income earned.
How You Earn Social Security Credits
The Social Security system is basically funded through a tax on
earnings whether you work for someone else, or for yourself. This
tax is comprised of two components: The Social Security portion is
6.20%, and the Medicare portion is the remaining 1.45% Further, this
tax is charged to both employee, and employer(for self-employed
people, a similar treatment is used in which the self-employed is
also considered the employer, hence paying nearly both sides).
The Social Security portion is "capped" out in that this tax stops
once the earnings reach $76,200 for 2000. However, the Medicare
portion is not "capped." You pay it no matter how much you earn.
How Your Retirement Benefits Are Calculated
In effect, you pay into Social Security just like a pension. For the
average retiree, how much one gets in Social Security benefits
depends on a complicated formula which involves the length of time
worked, amount contributed into Social Security, the age when one
retires, and how many years one contributed the maximum Social
Security payments.
For most retirees, a certain number of quarters of coverage paid
into the Social Security are required to get the maximum benefits.
For people who reach age 62 from 1991 or later, they normally need
40 quarters–or ten years–of coverage. For maximum benefits, the more
of these 40 quarters in which the retiree had contributed the
maximum into Social Security, the better it is, everything else
being equal. So, the more you pay into Social Security, the higher
on the benefit chart you will be.
Note: You can get a very good estimate of how much Social Security
you qualify for from the Social Security Administration. It is
planning to automatically send this to you on a periodic basis. If
you do not get it, you can request it. To do this, call Social
Security(800-772-1213) and request a "Personal Earnings and Benefits
Estimate Statement" form. You will get back in the mail in a few
weeks a form which shows your earnings to date on an annual basis,
and estimates of the monthly benefit you will receive at various
allowable retirement ages.
This report shows a record of your earnings history. Errors can –
and do – occur. It's your responsibility to spot these errors and
notify Social Security within a reasonable amount of time.
Otherwise, you could get less benefits than you deserve. A good rule
of thumb: Get this report every three years or so to check the
earnings figures while they are still fresh in your mind.
Applying For Social Security Benefits
For most people considering collecting Social Security retirement,
there is a choice of ages: 62 or 65 depending on whether one wants
full benefits at 65, or reduced benefits at the earlier age of 62.
However, beginning in year 2000, the full benefit age will begin
rising, until it reaches age 67 by year 2027.
How much your full benefit is reduced by taking the earlier 62 age
retirement depends on a number of factors, but as a guide, you can
figure your monthly benefits will be reduced by 20% if you retire at
62, 14% at 63, and 7% at 64.
Conversely, if you do not start taking benefits at 65, but wait, the
monthly check you will eventually receive from Social Security will
be increased on an average of 3% for each year you are eligible to
get Social Security, but elect not to take it and continue working
instead. This calculated credit will begin to rise over the next 15
years or so until it eventually becomes 8% instead of 3%.
You can get some very good estimates from the Social Security
Administration as to the specific amounts you will receive at
retirement when you get close to the two age choices to help you
decide. Some other factors to consider in determining which age to
choose: Will you be receiving any other types of pensions? Do you
have other sources of retirement such as savings? Will your spouse
continue to work? Will you continue to work, full or part-time?
Remember, once you elect early, reduced benefits at 62, there is no
going back. So review it carefully. The trade-off is getting earlier
benefits, although reduced amounts.
Once you start receiving Social Security benefits you will receive a
fixed amount each month. This may increase periodically since Social
Security has a form of "inflation adjustor" built in. A formula is
used to determine how much to increase your benefit if the official
cost of living increases and/or the average wage rate increases. For
last year, 1999, this cost of living increase amounted to 1.1%.
How To Apply For Benefits
Applying for benefits is fairly easy. You should start the process
two months in advance so your checks will start arriving on your
first retirement month and you have no "gaps" in your income stream.
However, if you are a little late in applying, you will get all the
benefits to which you are entitled from the first month you are
entitled–you just may have to wait longer to get them.
The process involves filling out a few simple forms and verifying
such information as your age, Social Security number, recent past
earnings statements, marriage/divorce papers, and recent tax return.
It usually involves only one relatively quick interview with a
social security administrator, and in many cases, can be done
through the mail.
If you have been working for yourself, then it can be a little more
complicated, but not necessarily so. Sometimes you need to provide a
little "proof" that you are really retiring from your business. Are
you selling it? Turning it over to other family members? Closing it
down? All they are trying to do is make sure you are really
retiring, not playing some game.
Taxability And Earning Limitations
Once you start collecting Social Security benefits there are two
possible limiting factors that involve future income and earnings.
The first issue relates to benefit recipients who continue to work
after signing up for Social Security benefits. Even though you are
receiving these retirement benefits, you can still earn a certain
amount of money without it affecting your benefits. However, beyond
a certain amount, you may have to start giving back some of the
benefits.
People under age 65 collecting these benefits can earn up to $10,080
per year without giving back any of their Social Security. Beyond
this amount, they must refund $1 for every $2 they make above this
annual exemption amount.
People from age 65 to 69 can earn up to $17,000 per year without
giving back any retirement benefits. Beyond this amount, they must
refund $1 for every $3 they earn.
People age 70 or higher can earn any amount without giving back any
of their Social Security benefits.
This calculation is performed on a monthly basis for the first year
in which you retire, to account for the transitional year in which
you may have earned more than these amounts prior to the month you
retire.
The second issue deals with whether or not your Social Security
benefits are subject to federal income tax. The answer is: It
depends!
In general terms, a portion of your benefits (up to 85% of them) may
be subject to federal(and state) income taxes if your total adjusted
income exceeds certain levels (1999 rules): $34,000 for a single
individual, and $44,000 for a married couple.
As you can see, these two issues, how much one can earn after
collecting Social Security, and how much tax one may have to pay on
the Social Security received, can have a major impact on when one
should apply for these benefits. This is where some financial
planning ahead of time may be quite beneficial!
Medicare
Medicare relates to the health insurance portion paid by the federal
government for those who are 65 or older, people with kidney
failure, or those categorized as disabled.
There are two components. First is the hospital insurance part which
assists in paying various inpatient hospital, nursing home, hospice,
or home health care costs. There are various deductibles and
limitations on reimbursements depending upon the number of days of
required care.
The second component is the "Part B" or Medical Insurance portion.
After a deductible, this program pays up to 80% of allowable medical
costs associated with physician-related services such as visits,
tests, therapy, and home health care, to name a few.
Note the term "allowable." Basically, that means Medicare medical
insurance will pay for what are considered "ordinary, necessary, and
customary" fees–which may be lower than your doctor is charging.
Unless your caregiver is "accepting assignment(that is, taking only
what Medicare will pay)," you must pay the differential. In
addition, there are various medical-type costs Medicare generally
doesn't cover, such as eyeglasses, normal custodial care, most
drugs, and various dental costs, to name a few.
This is why many people buy private "Medigap" policies after they
become eligible for Medicare. Since Medicare doesn't necessarily
cover 100% of all costs, the Medigap policy is designed to "pick up"
the bulk of the unpaid part.
There is a choice of these policies available varying in cost and
coverage from a very basic to a very comprehensive plan to help you
cover the charges that Medicare won't pay.
Medicaid
Medicaid is a government funded program to assist in paying various
medical bills for eligible low income people of any age. The
requirements vary somewhat but they are based on certain monthly
income and poverty level requirements.
Since this is primarily a state-responsible program assisted by the
federal government, requirements can vary from state to state.
Normally, anyone qualifying for Supplemental Social Security Income
will also be eligible to receive Medicaid.
Social Security Disability Benefits
For those who qualify as disabled under the Social Security
Administration guidelines, a monthly disability check may be
available. In fact, as of last year's statistics, there were over
3.4 million recipients of this program.
In addition to a disability check, qualifiers can receive Medicare
coverage as well after a 24 month "waiting" period. Those disability
persons with certain kidney problems may get the Medicare coverage
without this waiting period.
Similar to receiving Social Security benefits, in order to qualify
for a disability benefit, one must have earned enough work credits
based on the age at which the disability is recognized by the Social
Security Administration. For people age 31 or older as of the
present 2000 year, they need to have at least 5 years of these
credits during the past 10 years. However, disability due to
blindness has an easier formula to reach this 5 year credit
qualifier.
People who qualify as disabled earlier than age 31 may require less
work credits and work credit years. Conversely, the formula
increases with the recipient's age, until at age 62 or older it
requires a full 10 years of work credits to get the maximum
disability check.
"Disability" as far as the Social Security Administration is
concerned can be a far more stringent definition than with private
concerns. In a nutshell, to receive a disability check from the
government, two tests must be met:
You have a physical or mental condition that stops you from
performing ANY substantial work.
This condition will last at least 12 months, or will lead to death.
To prove your disability you will have to show medical evidence from
a qualified source regarding these qualifying tests. In addition,
the Social Security Administration can (and frequently does) require
a "second opinion" from medical sources they recommend. Also, your
disability is reviewed periodically – every four years or so on
average – to see to it your condition has not improved enough to
suspend the disability benefits.
What main conditions may qualify a person to seek Social Security
Disability? The general categories are as follows:
Blindness in which your CORRECTED vision is no more than 20/200.
Pulmonary diseases, and other "progressive diseases.
Certain arthritic conditions.
Brain abnormalities, and certain mental illness.
Cancer that cannot be controlled.
Kidney problems, certain digestive illnesses.
Loss of speaking ability, loss of limb functions.
Certain Aids-related illnesses.
Applying for Disability: Like Social Security, you need to apply for
disability with a written application. It is a detailed statement of
your condition with required back-up.
The claim will be reviewed, and it averages 3 months for this
processing in most cases. Your disability checks are paid on the
sixth month of the recognized disability date–unless you are under
22, in which case there may be no "deductible" period.
The amount of disability payment depends upon your qualifying work
credit formula. Generally speaking, the amount of benefit is similar
to the one a worker retiring at 65 would receive from Social
Security. The notable exception here concerns disability due to
blindness. In this case, the qualifying work credit formula is much
more lenient to get maximum benefits.
Can you work once you receive Social Security disability benefits?
For most people, the answer is NO. However, there are exceptions
involving part-time work, especially for those who are blind. Your
Social Security benefits administrator makes a decision in each case
on an individual basis.
Conclusion
Social Security, Medicare, Medicaid, and Disability benefits are
important mainstays to millions of Americans. Sadly for many, these
benefits represent the main source of financial survival. It is sad
because these benefits rarely cover all the normal financial
requirements to live a secure, comfortable life.
However, it is far better than many other countries. If there is any
"moral" to the Social Security System, it is that one should realize
early on that Social Security should be considered a supplemental
plan, not the main one–and save accordingly.
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