Ch9. Social Security — Retirement, Disability, and Survivor Benefits

Overview of Social Security

Social Security (Old-Age, Survivors, and Disability Insurance — OASDI):
Provides income replacement for retirement, disability, and death
Funded through payroll taxes (FICA)

Administering Agency:
Social Security Administration (SSA)

Covered Population:
Workers who have paid into the system through FICA taxes
Most US workers are covered (exceptions: some state/local gov employees)

Types of Workers:
Employees: withholding through employer payroll (mandatory)
Self-Employed: pay Self-Employment Tax (SE Tax) directly (mandatory)
Optional voluntary coverage: some excluded groups may elect coverage
Continued Coverage: workers may delay claiming beyond full retirement age

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Payroll Taxes (FICA)

FICA Tax Rate:
Wage/salary base × 12.4% for Social Security (OASDI)
+ 2.9% for Medicare (Hospital Insurance)

Employee:
Social Security: 6.2% (on wages up to annual wage base — ~$168,600 in 2024)
Medicare: 1.45% (no wage cap; additional 0.9% on wages over $200,000)

Employer:
Matches employee share: 6.2% Social Security + 1.45% Medicare

Self-Employed:
Pays full 12.4% (SS) + 2.9% (Medicare) as SE Tax
May deduct half of SE Tax from gross income

Exemptions / Credits:
Totalization agreements with other countries avoid dual coverage
Military service credits apply toward insured status
Unemployment insurance recipients may receive SS credits

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Benefit Types

Retirement (Old-Age) Benefits:
Requires 40 work credits (approximately 10 years of work)
Full Retirement Age (FRA): 67 for those born in 1960 or later
Benefit amount based on 35 highest-earning years (AIME calculation)

Early Retirement:
Can claim as early as age 62 with permanent reduction
Reduction: approximately 6.67% per year before FRA (up to 30% reduction)

Delayed Retirement Credits:
Claiming after FRA increases benefit by 8% per year, up to age 70

Spousal Benefits (Divorced Spouse):
Ex-spouse may claim up to 50% of worker's benefit if:
  - Marriage lasted at least 10 years
  - Divorced and currently unmarried
  - Worker's benefit has begun (or worker is eligible)

Disability Benefits (SSDI):
Worker must have a qualifying disability expected to last 12+ months
or result in death
Work credit requirements vary by age at onset
5-month waiting period before benefits begin

Survivor Benefits:
Paid to eligible survivors when an insured worker dies
Eligible: spouse, children, dependent parents
Spouse: 100% of deceased's benefit at FRA (or reduced amount earlier)
Children: up to 75% of deceased's benefit (under 18, or 19 if student)
Survivor benefit = 75%–100% of deceased's benefit depending on relationship

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Social Security Financing

Trust Fund Concerns:
Aging population and longer lifespans increasing beneficiaries
Declining worker-to-beneficiary ratio reducing revenue
Social Security Trust Funds projected to face shortfalls (~2030s)

Financing Method:
Pay-as-you-go (current workers fund current retirees) with partial reserve
Combined Old-Age and Survivors (OASI) + Disability (DI) Trust Funds

Reform Proposals Discussed:
Raising the payroll tax rate
Increasing the full retirement age
Adjusting the COLA (Cost-of-Living Adjustment) formula
Lifting or eliminating the wage base cap

Other Public Pension Programs:
Federal Employees Retirement System (FERS)
Military Retirement System
State/Local Government Pension Plans (some not covered by SS)

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Key Concept Cards

Retirement Benefit = 40 Credits + Age 67 (FRA) ★★★★★ : Must earn 40 work credits (~10 years) and reach Full Retirement Age of 67 (for those born 1960 or later). Memory tip: Social Security retirement = 40 credits + FRA 67

FICA Tax Rate = 6.2% + 1.45% (Employee Share) ★★★★★ : Employee pays 6.2% SS + 1.45% Medicare; employer matches. Self-employed pay full 15.3%. Memory tip: SS = 6.2% each side; Medicare = 1.45% each side

Survivor Benefits = 75%–100% of Deceased’s Benefit ★★★★☆ : Eligible survivors receive 75%–100% of the deceased worker’s benefit depending on age and relationship. Memory tip: survivor = 75–100%

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Practice Questions

Q. Why is the early retirement benefit permanently reduced compared to full retirement age?

Claiming early means collecting benefits for more years, so SSA reduces the monthly amount to maintain actuarial fairness over a lifetime. Claiming at 62 instead of 67 can reduce the benefit by up to 30%. Delayed claiming (up to age 70) increases the benefit by 8% per year after FRA.

Q. What are the requirements for a divorced spouse to claim Social Security spousal benefits?

The marriage must have lasted at least 10 years, the ex-spouse must be currently unmarried, and the ex-spouse must be at least 62 years old. The divorced spouse may receive up to 50% of the worker’s FRA benefit. This protects non-working or lower-earning spouses who contributed to the household indirectly.