Social Security Presentation

WHAT EVERYONE SHOULD KNOW ABOUT
SOCIAL SECURITY BENEFITS & THE SOCIAL SECURITY SYSTEM
ALVAREZ & MARSAL TAXAND, LLC

February 2012

THIS PRESENTATION WAS CONDUCTED BY:

Alvarez & Marsal Taxand, LLC
2100 Ross Avenue, 21st Floor
Dallas, TX 75201

Mark Spittell
Senior Director
214-438-1017
mspittell@alvarezandmarsal.com

Douglas Friesen
Director
214-438-8435
dfriesen@alvarezandmarsal.com

NOTICE

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INTENDED OR WRITTEN TO BE USED, AND CANNOT BE
USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY
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HEREIN.

The information contained herein is of a general nature and is not
intended to address the circumstances of any particular individual or
entity. Although we endeavor to provide accurate and timely
information, there can be no guarantee that such information is accurate
as of the date it is received or that it will continue to be accurate in the
future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular
situation.

© Copyright 2011 Alvarez & Marsal Holdings, LLC. All rights reserved. ALVAREZ & MARSAL®,
® and A&M® are trademarks of Alvarez & Marsal Holdings, LLC.

3
WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE
SOCIAL SECURITY SYSTEM

HOW BIG?

By dollars paid, the U.S. Social Security program is the largest government program
in the world and the single greatest expenditure in the federal budget

In 2010, total income was $781.1 billion and expenditures were $712.5 billion

Social Security is currently estimated to keep roughly 40 percent of all Americans age
65 or older out of poverty

90% of people 65 and older get Social Security

Nearly 2 in 3 (64%) get half or more of their income from Social Security

About 1 in 3 get almost all (90% or more) of their income from Social Security

WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 4

IS SOCIAL SECURITY LEGAL?
Two Supreme Court rulings affirmed the constitutionality of the Social Security Act

Steward Machine Company v. Davis, 3601 U.S., 548 (1937)

– 5-4 decision, that given the exigencies of the Great Depression, “(it) is too late today for the
argument to be heard with tolerance that in a crisis so extreme the use of the moneys of the
nations to relieve the unemployed and their dependents is a use for any purpose narrower than
the promotion of the general welfare”.

– The arguments opposed to the Social Security Act (articulated by justices Butler, McReynolds,
and Sutherland in their opinions) were:
» The Social Security act went beyond the powers that were granted to the federal
government in the Constitution
» They argued that, by imposing a tax on employers that could be avoided only by contributing
to a state unemployment compensation fund, the federal government was essentially
forcing each state to establish an unemployment-compensation fund that would meet its
criteria, and that the federal government had no power to enact such a program


IS SOCIAL SECURITY LEGAL?
Helving v. Davis, 301 U.S. 619 (1937)

– Decided on the same day as Steward

– Upheld the program because “The proceeds of both [employee and employer] taxes are to be
paid into the Treasury like internal revenue taxes generally, and are not earmarked in any way.”

» That is, the Social Security Tax was constitutional as a mere exercise of Congress‟s general
taxation powers


HOW MANY PEOPLE RECEIVE SOCIAL SECURITY?
54.2 million people receive Social Security each month in one of these categories:

– Retirement Insurance
– Disability Insurance
– Survivor Insurance

1 in 6 Americans gets Social Security benefits

About 1 in 4 households receive income from Social Security


First reported Social Security payment

– Ernest Ackerman

» Retired only one day after Social Security began. Five cents were withheld from his pay during
that period, and he received a lump-sum payout of seventeen cents from Social Security.


First monthly payment was issued on January 31, 1940 to Ida May Fuller of Ludlow,
Vermont

– In 1937, 1938 and 1939 she paid a total of $24.75 into the Social Security System

– Her first check was for $22.54

– After her second check, Fuller already had received more than she contributed over the three year
period.

– She lived to be 100 and collected a total of $22,888.92 - like hitting the lotto!


8.2 million disabled workers

– Disability insurance pays monthly benefits to 8.2 million workers who are no longer able to work
due to illness or impairment

– It is part of the Social Security program

– Benefits are based on the disabled worker‟s past earnings

– To be eligible, a disabled worker must have worked in jobs covered by Social Security


8.2 million disabled workers

4.4 million widows and widowers

2.5 million spouses

1 million adults disables since childhood

3.2 million children



HOW MUCH DOES SOCIAL SECURITY PAY?

Average Monthly
Type of Benefit Average Yearly
Beneficiary Jan. 2011 Benefit
All retired workers $1,177 $14,120
All aged widow(er)s, non-disabled $1,135 $13,260
All disabled workers $1,068 $12,816
Disabled worker, young spouse and
one or more children $1,807 $21,680
Widowed mother and two children $2,390 $28,680
Retired Worker and aged spouse $1,911 $22,930




Replacement Rates for Retired Worker Age 65, 2010 Benefits

$120,000 Past wages
$106,800
$100,000

$80,000
$65,700
$60,000

28% $41,100
$40,000
34%
$26,300 41%
$20,000
$22,200 $16,800 55% $18,500
$10,200

$0
Maximum Benefit High medium low



The more you make, the less you get back

– Prior chart shows Social Security “tilt” in favor of lower income workers.

– Lower Income Workers have fewer resources to save for retirement (so the theory goes), so
SS provides a bigger benefit.

– It‟s all about the “bend points”.


WHO PAYS FOR SOCIAL SECURITY?
Workers and their employers pay with Social Security contributions under the Federal
Insurance Contributions Act (FICA)


HOW MUCH DO WORKERS PAY?
Workers Pay:

– 6.2% of their earnings for Social Security (or 4.2% for 2011 and first two months of 2012 under
the temporary payroll tax holiday), and

– 1.45% of their earnings for Hospital Insurance (HI) under Medicare (Part A)

Employers pay an equal amount (6.2% &1.45%)

The total is 12.4% for Social Security and 2.9% for Hospital Insurance (HI). (Self
employed individuals pay the entire amount.)

The Social Security contribution wage base is $110,100 in 2012.


IS FICA SOCIAL SECURITY?
No

Federal Insurance Contributions Act

That‟s the TAX Contributions scheme that shows on your paystub.

Added to the Internal Revenue Code in 1939.


Social Security is OASDI (or OASDHI)

– OA is for Old Age (Social Security Act passed 1935)
» Part of President Roosevelt‟s New Deal Program
» First benefits paid in 1937

S is for Survivors (added in 1939)

D is for Disability (added in 1956)

H is for Health (known as Medicare – added in 1965)

– Part of President Lyndon Johnson‟s Great Society Program

I is for Insurance

– Really?
» Paying FICA taxes creates no legal right to benefits
» Right to benefits is statutory, and Congress can change it any time they want


In 1972, cost of living adjustments (COLAs) were added (effective in 1975)

– These amendments also established the supplemental Social Security Income (SSI).
» SSI is not a Social Security benefit, but is a welfare program
• The elderly and disabled poor are entitled to SSI regardless of work history

In 1977 Congress increased withholding from 2% to 6.15%.

– President Carter said:
» “Now this legislation will guarantee that from 1980 to the year 2030, the Social Security
funds will be sound.”
» Not so much.
• The financial picture declined almost immediately and by the early 1980‟s, the system
was again in crisis.


Under the 1983 amendments to Social Security

– A previously enacted increase in the payroll tax rate was accelerated

– Additional employees were added to the system

– The full-benefit retirement age was slowly increased
» From 65 to 67
» Up to one-half of the value of the Social Security benefit was made potentially taxable
income


AM I COVERED?
Dates of coverage for workers

– 1935 - All workers in commerce and industry (except railroads) under age 65

– 1939 - Age restriction eliminated, seamen, bank employees added; additional domestic
workers and food-processing workers removed

– 1946 - Railroad and Social Security earnings combined to determine eligibility for and amount
of survivor benefits

– 1950 - Regularly employed farm and domestic workers. Nonfarm self-employed (except
professional groups). Federal civilian employees not under retirements system. Non profit
organizations could elect coverage for their employees (other than ministers).

– 1951 - Railroad workers with less than 10 years of service, for all benefits. (After October 1951,
coverage is retroactive to 1937.)


AM I COVERED?

– 1954 - Farm self-employed. Professional self-employed except lawyers, dentist, doctors and
other medical groups. Additional regularly employed farm and domestic workers.
Homeworkers. State and Local government employees (except firefighters and police) under
retirement system if agreed to by referendum. Ministers could elect coverage as self-employed.

– 1956 - Members of the uniformed services. Remainder of professional self-employed except
doctors. By referendum, firemen and policemen in designated States.

– 1972 - Members of a religious order subject to a vow of poverty.

– 1983 - All federal civilian employees hired after 1983; members of Congress, the President and
Vice President and federal judges; all employees of nonprofit organizations. Covered state and
local government employees prohibited from opting out of social security.

– 1990 - Employees of state and local governments not covered under a retirement plan.


AM I COVERED?
Basically, if you work (in a SS covered employment) for 10 years, you are fully
insured and entitled to benefits.

– Quarters of coverage:
» One quarter credited for each $1,120 earned (2011)
• Prior to 1978, one quarter for each $50
• Has increased each year since 1978

» Max of four quarters per year
» Need 40 quarters of coverage for fully insured status


AM I COVERED?
To be currently insured

– You must have at least 6 quarters of coverage

– They must be in the last 13 calendar quarters ending with the quarter in which you:
» Die
» Become entitled to retirement or disability benefits

– Currently insured status is particularly important to your workers who have not yet been in the work
force for many years


AM I COVERED?
Dependent Benefits available for currently insured status;

– Lump Sum Death Benefit
» Don‟t get excited: it‟s a whopping $255

– Monthly payments to surviving spouse during the time your children are under 16 years of age

– Monthly payments to your children during the time they are under 18 years of age (or 19 if full time
student – pre college)


AM I COVERED?
Dependent Benefits available for Fully Insured status:

– All of the above, plus

– Monthly payments to surviving spouse at Normal Retirement Age (NRA)
» Or age 60 if reduced benefits are elected
» Or age 50 if disabled

– Monthly payments to your dependent father or mother at age 62.


AM I COVERED?
Disability Benefits

– Any age under Normal Retirement Age

– If after age 30, you must be:
» Fully insured
» Must have worked in covered employment for 5 out of the last 10 years

– If before age 31, you must have
» Quarters of coverage in at least ½ the quarters between age 21 and disability
• But not less than 6

– Disability must be expected to result in death or last at least 12 months.

– Disability benefit is your primary insurance amount at time of disability.
» These computations average less years of earnings when the worker dies or is disabled
before age 62 and use different base years for the inflation adjustments.
» Family members are entitled to benefits under the same rules that would apply if you retired


BASICS OF THE CALCULATION
There are two basic steps to determining your monthly benefits.

– The first step is computing your average indexed monthly earnings, or AIME.

– The second step, which incorporates the AIME, is to determine your primary insurance amount,
or PIA.
» The PIA is the basic value on which all of the various benefits under Social Security are
determined.
» There are maximum family benefits determined by the PIA
• Usually 150-180 percent of your own benefit payment. If the total benefits due to your
spouse and children are more than this limit, their benefits will be reduced. Your benefit
will not be affected.


AVERAGE INDEXED MONTHLY EARNINGS

Out of your entire yearly earnings from age 22 to 62 (40 Years), your highest 35 years
of earnings are used in the computation of your SS benefit (throw our the lowest five).

Your actual earnings are indexed to reflect the change in wage levels during your
working years.

– This provides that benefits will reflect the rise in the standard of living that occurred during your
working lifetime.


The calculation of AIME depends on the year in which you are first eligible to receive
retirements benefits, which is age 62.

– If you reach age 62 in 2011, then that is your year of eligibility.

» Earnings are indexed to the average wage index two years before your year of eligibility, or
when you reach age 60. So if you reach age 62 in 2011, then earnings from your prior working
years would be indexed to the average wage index for 2009 ( which is $40,711.61).

• Actual earnings are used for ages 61 and 62


The indexing factor for a prior year is determined by dividing the wage index for the
year the person reaches age 60 by the wage index for that prior year.

– Example: Individual reaches age 60 in 2009. To determine the indexing factor for, say 1980
you would divide 40,711.61 (the index for 2009) by 12,513.46 (the index for 1980, from IRS
tables)

» Get an index factor of 3.2534.
» If you made $12,000 in 1980, you would multiply this amount by 3.2534 to get an indexed
amount of $39,041 for purposes of the 35 year average.


Once each year‟s earnings from age 22 to 62 are indexed, highest 35 years of
indexed earning are added up.

– The sum is then divided by 420 to determine average monthly amount.

– This is your AIME

If you don‟t have 35 years of covered earnings

– ADD ZEROS TO THE CALCULATION FOR EACH OF THE MISSING YEARS


PRIMARY INSURANCE AMOUNT
Once you have the AIME, the next step in determining monthly Social Security benefit is
calculating the Primary Insurance Amount (PIA)

The PIA is the sum of three separate percentages of portions of AIME.

– These portions are known as the bend points

– The bend points depend on the year you reach age 62.

If you reach age 62 in 2011, your PIA is the sum of:

– 90% of the first $749 of your AIME, plus

– 32% of your AIME between $749 and $4,517, plus

– 15% of your AIME over $4,517.
» This amount is rounded down to the next multiple of $.10.


PRIMARY INSURANCE AMOUNT
Example:

– If your AIME is $5,521 ($66,252 annually), your PIA would be calculated as:

– 0.9(749)+0.32(4,517 – 749) + 0.15(5,521-4,517) = 2,030.46 which is rounded down to $2,030.40.

Bend points for earlier years can be found on the SS website:

– http://www.socialsecurity.gov/OACT/COLA/bendpoints.html

– Note that lower wage earners receive a larger percentage of their preretirement income, while higher
wage earners receive a lower percentage of their preretirement income.

The PIA is then adjusted by automatic cost-of-living adjustments annually starting with the
year the worker turns 62


EARLY OR DELAYED RETIREMENT
Once the PIA is calculated, we have the basis of determining the estimated monthly
benefit amount.

– This amount also depends on the actual age that you retire.

– The earliest that you can retire and receive benefits is age 62.
» If you retire early, your benefits are reduced for each month that you retire before your
normal retirement age.
» Conversely, if you delay your retirement beyond your normal retirement age, you will
receive a certain percentage increase for each month that you delay retirement beyond your
normal retirement age.

The normal retirement age is the age that you receive the full benefits as indicated by your PIA

– Determined by the year you were born (see next slide)

– For most people today (unless you are over age 52), the normal retirement age is now 67.
» It‟s 66 for those born from 1943 -1954


The normal retirement age (NRA) is the age at which retirement benefits (before
rounding) are equal to the “primary insurance amount.” The table below shows how
NRA varies by year of birth for retirees.
– Source: http://www.socialsecurity.gov/OACT/ProgData/nra.html

Normal Retirement Age

Year of Birth Age
1937 and Prior 65
1938 65 and 2 months
1943-54 66
1960 and later 67


If you were to retire early, your benefit would be reduced by 0.555% for each month before
normal retirement age, up to 36 months.

If the number of months exceeds 36, then the benefit is further reduced by 0.416% per
month for each month thereafter.

– This result is then rounded down to the next dollar to arrive at your reduced monthly benefit.


Example:

– Normal retirement age is 67; you retire at 63

» Retiring 48 months early.
» Your benefit reduction is calculated as 36 months multiplied by 0.555%, plus 12 months multiplied
by 0.416%.

• Therefore, your monthly benefit would be reduced by 25%, and you‟d only receive 75% of your
PIA. If your PIA were $1,983.10, your reduced benefit would be $1,487.33, which is then
rounded down to $1,487.



On the other hand, for most of us, if you were to delay retirement beyond your normal
retirement age, you‟d receive an increase in your PIA of 0.666% per month of delayed
retirement, or 8% a year.

– The specific percentage of your increase based on your year of birth, can be found on the following
slide


DELAYED RETIREMENT CREDITS

Social Security benefits are increased by a certain percentage(depending on date of
birth) if you delay your retirement beyond full retirement age.

This benefit increase no longer applies when you reach age 70, even if you continue
to delay taking benefits.

Increase for Delayed Retirement
Year of Yearly Rate Monthly Rate
Birth of Increase of Increase

1933-1934 5.5% 11/24 of 1%
1935-1936 6.0% 1/2 of 1%
1937-1938 6.5% 13/24 of 1%
1939-1940 7.0% 7/12 of 1%
1941-1942 7.5% 5/8 of 1%
1943 or later 8.0% 2/3 of 1%
Note: If you were born on January 1st, you should refer to the rate of increase for the previous year.


DELAYED RETIREMENT CREDITS

Important point: If you decide to delay starting your Social Security benefits, be sure
to

– Sign up for just Medicare at age 65.

If you do not sign up, in some circumstances your Medicare coverage may be
delayed and cost more!


SPOUSE’S SOCIAL SECURITY RETIREMENT BENEFIT
Any current spouse is eligible

Divorced or former spouses are eligible generally if the marriage lasted at least 10 years.

– Civil marriage of same sex couples are not recognized by OASDI for spousal benefits because the
federal Defense of Marriage Act (DOMA) law excludes them for federal recognition.

The spousal retirement benefit is half the PIA of the working spouse

– This is different from the spousal survivor benefit, which is the full PIA.

– The benefit is the product of the PIA, times one half, times the early retirement factor if the spouse
is younger than normal retirement age.

– There is no increase for starting spousal benefits after normal retirement age.
» This can occur if there is a married couple in which the younger person is the only worker and is
more than 5 years younger. Only after the worker applies for retirement benefits may the non-
working spouse apply for spousal retirement benefit.


SPOUSE’S SOCIAL SECURITY RETIREMENT BENEFIT
If spouses want to get Social Security retirement benefits before they reach full
retirement age, the amount of the benefit is reduced. The amount of reduction depends
on when the spouse reaches full retirement age.

– For example:

» If full retirement age is 65, a spouse can get 37.5% of the worker‟s unreduced benefit at age 62;
» If full retirement age is 66, a spouse can get 35% of the workers unreduced benefit at age 62
» If full retirement age is 67, a spouse can get 32.5% of the worker‟s unreduced benefits at age
62.

The amount of the benefit increases at later ages up to the maximum of 50 percentage
at full retirement age. If full retirement age is other than those shown here the amount of
the benefit will fall between 32.5% and 37.5% at age 62.


WIDOW(ER)’S BENEFITS
If a worker covered by Social Security dies, a surviving spouse (or surviving divorced
spouse) can receive survivor's benefits.

– A father or mother with minor or disabled children in his or her care can receive benefits which are
not actuarially reduced.

The earliest age for a nondisabled widow(er)‟s benefit is age 60.

The benefit is equal to the worker‟s full retirement benefit (PIA) for spouses who are at,
or older than, normal retirement age.

If the surviving spouse starts benefits before normal retirement age, there is an actuarial
reduction.

If the worker earned delayed retirement credits by waiting to start benefits after their
normal retirement age, the surviving spouse will have those credits applied to their
benefit.


Effect of Re-marriage

– After age 60, a widow(er)‟s (or surviving divorced spouse‟s) remarriage will not prevent that
individual from being entitled to benefits on his or her prior deceased spouse‟s social security
record.

– A widow(er)‟s (or surviving divorced spouse‟s) remarriage before age 60 will prevent entitlement
(unless the subsequent marriage ends).

So.........


The CREATIVE USE OF DIVORCE

– Example: Wife‟s high income earner husband died at her age 50 after 20 years of marriage
» Widow (now) remarries at age 55 to an individual who has very low SS earnings.
» Widow cannot collect on deceased husband‟s SS record since she remarried before age 60.

What to do?

– GET DIVORCED FROM THE NEW HUSBAND prior to age 60
» Say at age 59 11/12.
» Quickie, no fault divorce

– Apply for and collect widow‟s benefit on first husband‟s work record at age 60.
» If you are not married at age 60, you are entitled.

– Remarry second husband
» Will be able to continue widow‟s benefit for life.
» Don‟t need to tell anybody (except SS) about the divorce.


SHOULD YOU COLLECT WHILE YOU ARE STILL WORKING?
Might seem like a good idea

– Get paid from SS and your employer

HOWEVER

– For every $2 of income you make over $14,160 prior to reaching full retirement age

» SS withholds $1 in benefits
» Your monthly amount will be restored when you reach full retirement age, but you never get the
reduced payments back.


SHOULD YOU COLLECT WHILE YOU ARE STILL WORKING?
Example:

– File for SS this year at age 62 and continue to work
» Wages will be $32,000 a year

– Assume monthly benefits at 66 (your NRA) would be $1,498.
» You will get $1,123 at age 62 due to early retirement reduction

– Your wages would drop that payment to $942
» A $181/month reduction

– When you reach age 66, your payment goes back to $1,123
» You will never get the $1,498 because you started at age 62

SOCIAL SECURITY SYSTEM.

THE BIG DECISION: WHEN TO TAKE SOCIAL SECURITY
SIMPLE QUESTION: No simple answer!

Remember: the later you start, the bigger the benefit.

The system is actuarially neutral (in theory, at least).

– Live to an “average” age and you‟ll end up with the same total benefit no matter when you claim

– Not really true:

» Ex: women still live longer than men, but SS is unisex.
• Therefore, women are more likely to live past the “break-even age”, whatever that is.

» Ex: Income taxes may be paid on early distributions but not later ones.

SOCIAL SECURITY SYSTEM.

Are there ANY rules of thumb that make sense?

– If you are still working, don‟t claim benefits before your full retirement age.

» The exceptions:

• Need the payments to cover expenses NOW
• Are experiencing health concerns or not expecting to live to the average life expectancy
• Prefer to preserve other assets or investments
• Are the lower-earning spouse while the higher earning spouse continues to be employed.

WHAT EVERY ONE SHOULD KNOW ABOUT SOCIAL SECURITY BENEFITS & THE 50


– Don‟t take Social Security until you are sure you want it.

» Up until recently, there was a “do-over” strategy that got much attention.
• You could file for benefits, collect and then pay them back later (without interest) and get your bigger check
(including the inflation adjustments).
• In effect, you had 8 years (from 62-70) to change your mind about taking early benefits.
• It was truly an interest free loan from the government

– Now, you only have 12 months to change your mind
» Once in a lifetime option
» No repayment allowed
» Increase in benefits will be marginal



– Don‟t get hung up on the break-even date

» That‟s the age you have to live to so that waiting to collect a bigger check pays off.
» Depends on the discount rate you apply when valuing future benefits

• Ex: Using a 2% discount rate, waiting until 66 instead of taking benefits at 62 pays off if you
live until around 80

o Using a 4% rate, you must live until 84



– Don‟t get hung up on the break-even date

» Doesn‟t take into account “hardy genes”.

• One newer concept is that by waiting to claim a bigger check you are buying “longevity
insurance”
o Insurance against outliving your money
o By waiting, you are effectively buying a larger inflation adjusted lifetime annuity for a lot
less than you could buy it from a commercial Insurance company.
 Even a low cost, non-commission provider.

WHAT EVERYONE SHOULD KNOW ABOUT SOCIAL SECURITY 53
BENEFITS & THE SOCIAL SECURITY SYSTEM

Are there ANY rules of thumb that make sense - continued?

– The Couples Game

» Can get really complicated
» Understanding the SS rules is very important to make this work
» Here we are utilizing the favorable way SS treats married couples
• If a partner dies, the survivor can claim the deceased spouse‟s check instead of his or
her own (assuming it is bigger).
• We take the benefit of joint mortality
o There‟s a greater chance with two individuals that at least one of them will live to a ripe
old age and collect the bigger check
• To make it work, at least one partner (usually, the higher earner) should delay benefits
well past NRA to buy higher lifetime “second to die” annuity for the pair.



– How about when both partners are still alive?

» When you claim benefits, you get the greater of what you have earned on your own work record
or up to half of your living spouse‟s full retirement benefit.
» Low earning spouse taking early spousal benefits has an even bigger reduction than the primary
wage earner

• Claim at age 62, get 35% of the primary earner‟s PIA instead of 50%.
• Remember: no extra benefits for waiting past full retirement age to claim check




» Example: If working husband is four years older than wife, a one income couple would receive
the maximum benefit if:

• Husband claimed at age 70
• Wife claimed spousal benefits at 66.




» Claim Now, Claim More Later

• Example: Working Husband is four years older than working wife:
o Husband claims his full benefits at 66.

o When wife reaches her full retirement age (four years later), she applies for spousal
benefits, but keeps on working
 First four years, they had only his check coming in

o At age 70, she applies for her own SS benefits
 From age 66 – 70, she‟ll get up to 50% of his benefits
 At age 70, she‟ll get her own maximum benefits which will be worth 32% more than
they would have been at age 66




» Claim Now, Claim More Later – another example

• Example: Working husband is the same age as working wife (similar incomes):

o Wife claims her full benefits at age 66

o Husband claims 50% spousal benefit, but keeps on working
 They get two SS security checks from the beginning

o At age 70, he applies for his own SS benefits
 From age 66 – 70, he‟ll get 50% of her benefits
 At age 70, he‟ll get his own maximum benefits which will be worth 32% more than
they would have been at age 66.




» Claim and Suspend:

• Suppose couple wants at least some cash coming in from SS before working spouse
reaches age 70?

o This is particularly attractive when only one spouse works OR when one spouse makes
significantly more than the other
o Example: Husband worked all his life, wife is a homemaker




» Claim and Suspend (continued):

• Husband can claim his benefits (at age 66) and then ask that they be immediately
suspended!
o Because he has claimed, his spouse is eligible for her spousal benefits

• He can continue to work, and wait for the bigger benefit due to deferral at age 70.
o Increases his benefits

• Also increases her survivor benefits if he should die before she does


TIMING IS EVERYTHING
When a married couple files can mean a difference of $600,000 in lifetime benefits.
The chart shows the cumulative amounts, including survivor benefits, that would be
paid by Social Security to a couple, now both age 61, based on when each starts
collecting. In this example, the husband earns $84,000 a year and dies at 80, his wife
earns $53,000 and lives to 95

Timing is Everything
$2,500,000
Cumulative Social Security Benefits

$2,027,000
$2,000,000 $1,915,000

$1,500,000 $1,426,000

$1,000,000

$500,000

$0
Both at Age 62 She at Age 62 & He at Age 70 She at Age 66 & He at Age 70

Ages at which Spouses take Social Security
Source; T.Rowe Price. Based on an average inflation rate of 2.8 percent. * Spousal benefit.


TIMING IS EVERYTHING

Timing is Everything
$2,500,000
Cumulative Social Security Benefits

$2,027,000
$2,000,000 $1,915,000

$1,500,000 $1,426,000

$1,000,000

$500,000

$0
Both at Age 62 She at Age 62 & He at Age 70 She at Age 66 & He at Age 70

Ages at which Spouses take Social Security
Source; T.Rowe Price. Based on an average inflation rate of 2.8 percent. * Spousal benefit.


TAXES
Think SS benefits ARE ALWAYS TAX FREE?

– THINK AGAIN!

– They weren‟t ALWAYS subject to tax
» Tax free until 1984
• Reagan-era reforms to repair the system‟s projected insolvency
• For retirees with incomes over (simplified):
o $25,000 (single), or
o $32,000 combined (married filing jointly)
• Part of the retiree benefits would be subject to Federal income tax.

– In 1984, the portion of the benefits potentially subject to tax was 50%

– Under the Deficit Reduction Act of 1993, the portion of benefits potentially subject to tax was
increased to 85% beginning with the 1994 tax year.


TAXES
Calculating the tax bite - not straightforward

– Start with the Adjusted Gross Income (AGI) from your 1040 and add the following amounts:

» 50% of your Social Security benefits.
» Tax-free municipal bond interest income ( from line 8b of Form 1040).
• Those are the two that apply to most taxpayers
• But there are a bunch of others


TAXES

– Additional items added to AGI :
» Tax free interest on U.S. Savings Bond used to pay for qualified college expenses (from IRS Form
8815)
» Tax free adoption assistance payments from your employer (from IRS 8839).
» The page 1 deduction for student-loan interest.
» The page 1 deduction for higher education tuition and related fees.
» The Page 1 deduction for domestic production activities (from IRS Form 8903).
» Tax free foreign earned income and housing allowances and certain tax-free income from Puerto
Rico or U.S. possessions (from IRS Forms 2555 and 4563).

– The result of doing all this arithmetic is your provisional income for the year.
» Your adjusted gross income
» + non-taxable interest
» + 1/2 of your Social Security benefits
» = your “provisional income”


TAXES

– If your provisional income does not exceed the $25k/$35k amounts noted earlier:
» Your Social Security benefits will be totally federal-income-tax-free
• There are special income rules for married filing separately

– If your provisional income is between:
» $25,001 and $34,000 (single)
» $32,001 and $44,000 (married filing jointly)
• You must report up to 50% of your Social Security benefit as income on your Form 1040


TAXES

– If your provisional income is above:
» $34,000 (single)
» $44,000 (married filing jointly)
o You must report up to 85% of your Social Security benefits as income on your Form 1040

– You still don‟t know exactly how much of your benefits must actually be reported as income on
your return!

– Trust me: you don‟t want to learn all the sordid details about how to figure that out.
o Use on-line calculators; tax software; or your accountant
o The full rules are in IRS publication 915


TAXES
According to the SS Administration

– Approximately 1/3 of the 52 million people who receive SS pay income taxes on their benefits

– In 2010 more than $23.9 billion was collected
» The calculation used to determine the taxable amount of SS has not changed since 1983
» The income break points used for this calculation have not been indexed to inflation for over 27
years

The tax applies to SS disability and survivor benefits also

– But if paid to dependent children, the calculation is done on their tax return.


TAXES - EXAMPLE
Married Taxpayers;

– If you are a married couple and receive $40,000 in SS benefits:
» None of your benefits are taxable if your other income is less than $12,000.
» For every dollar between $12,000 and $24,000, an additional 50 cents becomes taxable.
» For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other
income of 56,941, which makes the maximum $34,000 taxable.

– The table below assumes that you have no dependents (exemption of $7,400) and take the
standard deduction ($13,900 for a married couple over 65), so your first $21,300 of income is
not taxable.
Adjusted
Non-SS Taxable Gross Taxable Tax Additional SS taxed Marginal
Income SS Income Income Bracket for each $1 income tax rate
12,000 0 12,000 0 0% 0.5 0%
18,200 3,100 21,300 0 10% 0.5 15%
24,000 6,000 30,000 8,700 10% 0.85 18.50%
28,486 9,814 38,300 17,000 15% 0.85 27.75%
56,595 33,705 90,300 69,000 25% 0.85 46.25%
56,941 34,000 90,941 69,641 25% 0 25%


ANNUAL SOCIAL SECURITY STATMENTS
What happened to my annual Social Security Statement?

– SS started sending annual earnings statement in 1999 to all workers age 25 and older
» Required by law – OBRA „89

– SS mailed out 152 million statements in FY 2010.
» They cost approximately $70 million per year to print and mail
» Over 500,000 delivered every day
» They were the largest customized mailing ever undertaken by a Federal agency.

– SS stopped mailing statements during FY 2011 in a cost reduction effort.

– SS has recently announced that the mailing of the statements will resume later this year.


PURPOSE OF SOCIAL SECURITY
One Leg of Three Legged Retirement Stool

– Social Security is not intended to be the sole source of retirement funds.


CHANGES BEING DISCUSSED:
Benefits:

– Create new minimum “floor” benefits for very low income earners

– Means testing of benefits for higher earning recipients

Personal Accounts

– Very popular but seems unlikely in the short term because it will give rise to additional funding
shortfalls

Retirement Age

– Gradual increase in normal retirement age from 67 to 70

– Gradual increase in early retirement age from 62 to 65


CHANGES BEING DISCUSSED:
Cost of Living

– Change the way the COLA is calculated to reduce future increases in benefits

Payroll Taxes

– Donut Hole: Subject earned income up to Social Security wage base and earned income over
$250,000 to 6.2% withholding rate

– Eliminate Social Security wage base limit with respect to 6.2% withholding rate

Other

– Expand coverage by including new hired State and City employees in Social Security


QUESTIONS?

Mark Spittell 75
2100 Ross Ave
Suite 2100
Senior Director
Dallas, TX 75201
Direct: (214) 438-1017
Mobile: (469) 585-1956
E-mail: mspittell@alvarezandmarsal.com

Mark Spittell is a Senior Director with Alvarez & Marsal Taxand, LLC. He brings 25 years of experience in assisting companies with
compensation and benefits issues.
Mr. Spittell provides tax advice to company management regarding qualified and nonqualified retirement plans addressing such issues as
plan design, best practices, resolution of regulatory compliance issues, performance of nondiscrimination testing, preparation of
complicated regulatory filings, and assistance with IRS Voluntary Compliance Program filings. Mr. Spittell also has assisted clients with
Department of Labor benefit plan investigations and inquiries
Mr. Spittell performs payroll reviews for Federal and employment tax compliance and assists clients to resolve outstanding employment tax
issues. In addition, he has extensive knowledge and hands on experience in most aspects of Voluntary Employee Beneficiary Associations
(VEBAs) and welfare benefit plans.
Prior to joining A&M, Mr. Spittell was a senior manager with KPMG. Previously, Mr. Spittell spent 11 years with the Internal Revenue
Service as an Employee Plans Specialist. He served as Closing Agreement Coordinator for the Midstates Key District for over five years. In
addition, as the Employee Plans Senior Reviewer, Mr. Spittell was responsible for reviewing and processing the largest and most
complicated agreed and unagreed plan examinations and determination applications.
Mr. Spittell received a bachelor's degree in business administration from the California State University at Fullerton. He is a Certified Public
Accountant and a Certified Pension Consultant.

NOTE: Alvarez & Marsal employs CPAs
but is not a licensed CPA firm.

Doug Friesen 76
2100 Ross Avenue
21st floor
Director
Dallas, TX 75201
Direct: (214) 438-8435
Mobile: (469) 463-2779
E-mail: dfriesen@alvarezandmarsal.com

Doug Friesen is a Director with the Compensation and Benefits practice of Alvarez & Marsal Taxand in Dallas.
Mr. Friesen provides tax advice to corporate clients on executive compensation matters, including issues related to stock options, restricted
stock, performance units, Golden Parachute rules, deferred compensation rules under IRC 409A, accounting for compensation awards and
the one-million-dollar deduction limitation.
Mr. Friesen also assists clients with qualified and non-qualified retirement plans, addressing issues such as plan design, performing
nondiscrimination testing, mergers and acquisitions due diligence, and preparation of regulatory filings Prior to joining A&M, Mr. Griffin was
a consultant with the executive compensation practice at Mercer Human Resource Consulting. While at Mercer, he worked with a broad
group of clients, including Fortune 500 companies.
Prior to joining A&M, Mr. Friesen was an Analyst with the Plan Design and Analysis Department of Clark Consulting, where he assisted in
the design of non-qualified retirement plans, determined the appropriate corporate-owned life insurance financing solution, and created
financial models to illustrate projected performance. Prior to Clark Consulting, he was an Internal Audit Consultant with Protiviti Consulting.
Mr. Friesen earned a bachelor's degree, cum laude, in finance, with a minor in economics, from the Kansas State University Business
Honors Program.

NOTE: Alvarez & Marsal employs CPAs
but is not a licensed CPA firm.

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