SECTION 1. SOCIAL SECURITY: THE OLD AGE, SURVIVORS, AND DISABILITY INSURANCE (OASDI) PROGRAMS CONTENTS 1996 Social Security Information General Brief Description of Social Security Programs Concept of Social Insurance Financing Mechanism Brief History Social Security Coverage of the Work Force Benefits Eligibility for Workers Disability Eligibility for Dependents and Survivors Benefit Computation Full Retirement Age Trends in Retirement Age Trends in Longevity Average Indexed Monthly Earnings Benefit Formula Special Minimum Benefit Benefit Amounts Replacement Rates Benefit Reduction and Increase Dual Entitlement Actuarial Reduction Delayed Retirement Credit Maximum Family Benefit Earnings Limit Offsets Suspension of Benefits to Prisoners Cost-of-Living Adjustments Taxation of Benefits Determination of Disability Benefits Determination of Disability Application of Law and Regulations Federal Review of State Determinations Periodic Review of Individuals Receiving Disability Benefits Medical Improvement Standard Medical Evidence Attorneys' Fees and Representation Vocational Rehabilitation Disability Claims and Appeals Structure Changes in Enrollment and Applicant Backlogs Disability Insurance (DI) Awards and Recipients Pending Claims and Waiting Times Characteristics of Recipients OASDI DI Social Security Financing Current Law Status of OASDI Trust Funds How the Status of the Trust Funds is Measured Nature of the Social Security Trust Funds Budgetary Treatment of OASDI Current Budget Rules Pertaining to Social Security Current House and Senate Procedural Rules to Protect Social Security's Financial Condition Budgetary Treatment of Administrative Expenses Legislative History Changes in the 95th Congress Changes in the 96th Congress Changes in the 97th Congress Changes in the 98th Congress Changes in the 99th Congress Changes in the 100th Congress Changes in the 101st Congress Changes in the 102d Congress Changes in the 103d Congress Changes in the 104th Congress Appendix Relationship of Taxes to Benefits for Social Security Retirees: Illustrations of the Amount of Time It Takes To Recover the Value of Taxes Paid, Plus Interest Illustrative Payback Times References 1996 SOCIAL SECURITY INFORMATION Tax rate: Employee/employer each--7.65%; (6.20%--OASDI; 1.45%--HI). Self-employed--15.30%; (12.40%--OASDI; 2.90%--HI). Maximum taxable earnings base: Social Security (OASDI).................................... $62,700 Medicare (HI).............................................. No Limit Maximum FICA/SECA tax: \1\ --------------------------------------------------------------------------- \1\ FICA/SECA tax paid by employers and self-employed can be partially deducted under income tax rules. OASDI HI Employee/employer.................... $3,887 No limit. Self-employed........................ 7,774 No limit. ------------------------------------------------------------------------ OASDI workers covered.--1996 (est.)--142 million. Average Wage Level.--1994--$23,753.53. Earnings required for a quarter of coverage.--$640; ($2,560 for 4). Earnings limit exempt amounts: $12,500 for beneficiaries age 65-69; ($1 for $3 withholding rate). $8,280 for beneficiaries under age 65; ($1 for $2 withholding rate). Medicare (SMI) premium.--$42.50/month. Number of OASDI beneficiaries (12/95) (in millions): Total OASDI beneficiaries.................................. 43.4 OASI beneficiaries..................................... 37.5 Retired workers.................................... 26.7 Families and survivors............................. 10.9 DI beneficiaries....................................... 5.9 Disabled workers................................... 4.2 Family members..................................... 1.7 Average monthly benefits (12/95): Retired Worker............................................. $720 Retired worker and aged spouse............................. 1,215 Disabled worker............................................ 682 Disabled worker, spouse and children....................... 1,140 Aged widow(er)............................................. 680 Widowed mother/father and 2 children....................... 1,377 1996 SOCIAL SECURITY INFORMATION--Continued Monthly benefits for 1996 retirees At 62 At 65 Low earner (45% of average wages)....................... $430 $537 Average earner.......................................... 709 886 Maximum earner.......................................... 999 1,248 ------------------------------------------------------------------------ Long-range replacement rates (in percent): Retirement at age 67 in 2030 and later: Low earner (45% of average wages).......................... 56 Average earner............................................. 42 Maximum earner............................................. 28 COLA (effective January 1996).--2.6%. Taxation of benefits--percent of benefits taxed: Percent taxed Income threshold Filing status Up to 50%..................... $25,000-$34,000.. Individual. $32,000-$44,000.. Joint. Up to 85%..................... $34,000 +........ Individual. $44,000 +........ Joint. ------------------------------------------------------------------------ Substantial gainful activity: $500/month disabled/nonblind; $960/month blind. OASDI Trust Fund operations (in billions of dollars): OASDI Trust Fund operations --------------------------------------- Calendar year Net Income Outgo increase Balance 1995............................ $399.5 $339.8 $59.7 $496.1 1996 (est.)..................... 424.9 354.6 70.3 566.4 ------------------------------------------------------------------------ Fiscal Year 1995 OASDI Outlays.--$336 billion--21.8% of total U.S. Budget of $1.54 trillion. SAA info.--1-800-SSA-1213. SSA On Line.--http://www.ssa.gov/SSA__Home.html Source: Social Security Administration and Board of Trustees (1996). GENERAL Brief Description of Social Security Programs The Old-Age, Survivors, and Disability Insurance (OASDI) Programs provide monthly benefits to retired and disabled workers, their dependents and survivors. The OASDI Programs are contained in title II of the Social Security Act, and are commonly known as ``Social Security.'' Old-age benefits were provided for retired workers by the original Social Security Act of 1935, benefits for dependents and survivors were provided by the 1939 amendments, and benefits for disabled workers were enacted in 1956. The Hospital Insurance (HI) Program, enacted in 1965 as title XVIII of the Social Security Act, is closely related to the OASDI Program. (The HI Program is discussed in later sections.) Concept of Social Insurance When the OASDI Programs were created, ``insurance'' was included in their titles to show that their purpose is to replace income that is lost to a family through the retirement, death, or disability of a worker who has earned protection against these ``risks.'' This protection was to be obtained by working in jobs that are covered under Social Security and therefore subject to payroll taxes that finance Social Security benefits. Once workers worked long enough in covered jobs to be ``insured,'' they and their families would have eligibility for their benefits as a matter of ``earned right.'' The level of benefits is based on the amount the worker earned in covered jobs, and are paid without a test of economic need. However, the social ends the programs serve diverge somewhat from the insurance analogy. The programs are national, and coverage is generally compulsory and nearly universal. They are designed to address such social purposes as alleviating poverty, providing added protection of families versus single workers, and providing a larger degree of earnings replacement for low-paid versus high-paid workers. The OASDI Programs were therefore described as ``social'' insurance. Financing Mechanism The primary source of revenue for OASDI is the payroll tax paid by workers covered by the program and their employers. OASI and DI have separate tax rates set by law. Coverage under Social Security is generally compulsory. Currently, an estimated 96 percent of the Nation's paid work force is covered either voluntarily or mandatorily. The taxes for wage and salaried workers are imposed under the Federal Insurance Contributions Act (FICA, chapter 21 of the Internal Revenue Code). Taxes are based on earnings up to the annual maximum taxable wage base ($62,700 in 1996 for OASDI, with no limit on wages subject to HI). The employee share of the payroll tax is withheld from wage and salary payments, and is matched by employers, currently at a rate of 7.65 percent each. Self-employed persons are covered by the Self-Employment Contributions Act (SECA, chapter 2 of the Internal Revenue Code). They pay contributions on their net earnings annually up to the same maximum as employees, but at a rate that is equal to the combined employee-employer tax rate. However, the self-employed may deduct 7.65 percent from their net earnings before computing their Social Security tax and may also deduct half of their Social Security tax as a business expense for income tax purposes. Revenue from the OASI and DI portion of the tax is credited to the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund. In addition, the revenue derived from the taxation of a portion of 50 percent of Social Security benefits is credited to each trust fund (for additional detail, see section on ``Taxation of Benefits''). The trust funds are the source of payment for: (1) monthly benefits when the worker retires, becomes totally disabled, or dies (including a financial interchange with the Railroad Retirement System), and (2) administrative expenses for the program. A discussion of OASDI administrative costs may be found in a later section on ``Budgetary Treatment of OASDI.'' BRIEF HISTORY The 1935 Social Security Act covered only workers in commerce and industry, then about 60 percent of the work force. At first, the act provided only monthly benefits to retired workers age 65 and over, and a lump-sum death benefit to the estate of these workers. The monthly benefits were to begin on January 1, 1942. The 1939 Social Security amendments provided benefits to dependents of retired workers (wives aged 65 and over and children under age 16); and to survivors of deceased workers (widows aged 65 and over, mothers caring for an eligible child, children under age 16, and dependent parents). In addition, the 1939 amendments provided that these benefits would begin in 1940. The 1939 amendments were the first in a nearly 40-year series of program expansions. In 1956, benefits were extended to disabled workers aged 50-64, and to disabled children over age 18 of retired, disabled, or deceased workers, if they became disabled before age 18 (changed to disabled before age 22 in 1973). The 1958 amendments provided benefits to dependents of disabled workers on the same basis as dependents of retired workers. Benefits for disabled workers under age 50 were provided in 1960. Monthly cash benefits were increased on an ad hoc basis 10 times before the first automatic cost-of-living adjustment was implemented by the Social Security amendments of 1972. Beginning in 1975, benefits have been automatically adjusted to keep pace with inflation. Since 1975, there have been increases annually except during calendar year 1983, when the adjustment was delayed 6 months (see table 1-1). SOCIAL SECURITY COVERAGE OF THE WORK FORCE In 1939, approximately 24 million persons worked in employment covered by the Social Security system. Over the years, major categories of workers were brought under the system, such as self-employed individuals, State and local government employees (on a voluntary basis), regularly employed farm and domestic workers, members of the armed services, and members of the clergy and religious orders (on a voluntary basis). In 1996, of a total work force of approximately 148.8 million workers, about 142 million workers and an estimated 96 percent of all jobs in the United States are covered under Social Security. Of the total work force, an estimated 13.7 million workers were self-employed in 1996. In 1994, an estimated 87 percent of all earnings from jobs covered by Social Security were taxable (see tables 1-2 and 1-3). TABLE 1-1.--SOCIAL SECURITY BENEFIT INCREASES SINCE THE BEGINNING OF THE PROGRAM [In percent] ------------------------------------------------------------------------ Amount of Date increase paid increase ------------------------------------------------------------------------ January 1996............................................... 2.6 January 1995............................................... 2.8 January 1994............................................... 2.6 January 1993............................................... 3.0 January 1992............................................... 3.7 January 1991............................................... 5.4 January 1990............................................... 4.7 January 1989............................................... 4.0 January 1988............................................... 4.2 January 1987............................................... 1.3 January 1986............................................... 3.1 January 1985............................................... 3.5 January 1984............................................... 3.5 July 1982.................................................. 7.4 July 1981.................................................. 11.2 July 1980.................................................. 14.3 July 1979.................................................. 9.9 July 1978.................................................. 6.5 July 1977.................................................. 5.9 July 1976.................................................. 6.4 July 1975 \1\.............................................. 8.0 April/July 1974 \2\........................................ 11.0 October 1972............................................... 20.0 February 1971.............................................. 10.0 February 1970.............................................. 15.0 March 1968................................................. 13.0 February 1965.............................................. 7.0 February 1959.............................................. 7.0 October 1954............................................... 13.0 October 1952............................................... 12.5 October 1950............................................... 77.0 ------------------------------------------------------------------------ \1\ Automatic COLAs began. \2\ Increase came in two steps. Source: Social Security Administration. TABLE 1-2.--CIVILIAN WORKERS COVERED BY SOCIAL SECURITY SYSTEM, 1939-94 [In millions] ---------------------------------------------------------------------------------------------------------------- OASDI and Year Paid civilian OASDI Percent HI-only Percent employees \1\ coverage covered coverage covered ---------------------------------------------------------------------------------------------------------------- 1939 \2\................................................ 43.6 24.0 55.1 24.0 55.1 1944 \2\................................................ 51.2 30.8 60.2 30.8 60.2 1949 \2\................................................ 56.7 34.3 60.5 34.3 60.5 1955.................................................... 62.8 51.8 82.5 51.8 82.5 1960.................................................... 64.6 55.7 86.2 55.7 86.2 1961.................................................... 65.3 56.1 85.9 56.1 85.9 1962.................................................... 66.4 57.3 86.3 57.3 86.3 1963.................................................... 67.6 58.5 86.5 58.5 86.5 1964.................................................... 69.3 60.1 86.7 60.1 86.7 1965.................................................... 71.6 62.7 87.6 62.7 87.6 1966.................................................... 73.6 64.9 88.2 64.9 88.2 1967.................................................... 74.4 65.7 88.3 65.7 88.3 1968.................................................... 75.9 67.1 88.4 67.1 88.4 1969.................................................... 78.0 68.6 87.9 68.6 87.9 1970.................................................... 77.8 69.9 89.9 69.9 89.9 1971.................................................... 79.6 71.7 90.1 71.7 90.1 1972.................................................... 82.6 74.7 90.4 74.7 90.4 1973.................................................... 85.6 77.6 90.6 77.6 90.6 1974.................................................... 85.4 77.3 90.5 77.3 90.5 1975.................................................... 86.0 77.9 90.6 77.9 90.6 1976.................................................... 89.2 81.0 90.9 81.0 90.9 1977.................................................... 93.5 85.1 91.0 85.1 91.0 1978.................................................... 97.0 88.4 91.2 88.4 91.2 1979.................................................... 99.4 90.7 91.3 90.7 91.3 1980.................................................... 98.9 89.3 90.3 89.3 90.3 1981.................................................... 99.0 90.2 91.1 90.2 91.1 1982.................................................... 98.3 89.8 91.4 89.8 91.4 1983.................................................... 102.2 93.6 91.6 96.0 94.0 1984.................................................... 105.5 97.9 92.7 100.3 95.0 1985.................................................... 107.7 100.0 92.9 102.4 95.1 1986.................................................... 110.2 104.1 94.4 106.5 96.6 1987.................................................... 113.3 107.5 94.8 110.0 97.1 1988.................................................... 115.6 109.8 95.0 112.4 97.3 1989.................................................... 117.4 111.7 95.2 114.4 97.4 1990.................................................... 117.0 111.3 95.2 114.1 97.5 1991.................................................... 116.3 111.0 95.5 113.3 97.5 1992.................................................... 117.8 112.7 95.7 114.8 97.5 1993.................................................... 120.3 115.3 95.8 117.4 97.6 1994.................................................... 124.6 119.7 96.1 121.8 97.8 ---------------------------------------------------------------------------------------------------------------- \1\ Includes paid employees and self-employed for all years. \2\ Monthly average for these years, all other years as of December. Source: Office of Research and Statistics, Social Security Administration. TABLE 1-3.--CIVILIAN WAGES COVERED BY OASDI SYSTEM, 1950-94 \1\ [Dollars in billions] ---------------------------------------------------------------------------------------------------------------- Earnings in Taxable covered employment Covered earnings as -------------------- Total earnings a percent Year Total earnings as a Taxable of total earnings Self- in covered percent earnings earnings in Employed employed employment of total covered earnings employment ---------------------------------------------------------------------------------------------------------------- 1950................................. 186.1 109.8 ........ 109.8 59.0 87.5 79.7 1955................................. 257.4 171.6 24.5 196.1 76.2 157.5 80.3 1960................................. 324.9 236.0 29.2 265.2 81.6 207.0 78.1 1965................................. 428.8 311.4 40.3 351.7 82.0 250.7 71.3 1970................................. 631.7 483.6 48.0 531.6 85.2 415.6 78.2 1975................................. 940.1 717.2 70.4 787.6 83.8 664.7 84.4 1976................................. 1,037.2 797.2 76.8 874.7 84.3 737.7 84.3 1977................................. 1,140.4 879.5 80.6 960.1 84.2 816.6 85.0 1978................................. 1,288.6 998.9 93.7 1,092.6 84.8 915.6 83.8 1979................................. 1,437.1 1,122.0 100.2 1,222.2 85.0 1,067.0 87.3 1980................................. 1,548.4 1,231.0 97.8 1,328.8 85.8 1,180.7 88.9 1981................................. 1,696.5 1,352.0 98.9 1,450.9 85.5 1,294.1 89.2 1982................................. 1,764.0 1,418.0 98.6 1,516.6 86.0 1,365.3 90.0 1983................................. 1,870.8 1,502.0 113.2 1,615.2 86.3 1,454.1 90.0 1984................................. 2,086.0 1,671.5 129.3 1,800.8 86.3 1,608.8 89.3 1985................................. 2,246.2 1,794.5 142.3 1,936.8 86.2 1,722.6 88.9 1986................................. 2,389.2 1,921.0 160.8 2,081.8 87.1 1,844.4 88.6 1987................................. 2,571.4 2,057.1 179.9 2,237.0 87.0 1,960.0 87.6 1988................................. 2,767.3 2,227.9 199.7 2,427.6 87.7 2,088.4 86.0 1989................................. 2,933.7 2,371.7 210.9 2,582.6 88.0 2,239.5 86.7 1990 \2\............................. 3,108.3 2,511.3 195.6 2,706.9 87.1 2,358.7 87.1 1991 \2\............................. 3,192.4 2,565.2 197.2 2,762.4 86.6 2,423.5 87.7 1992 \2\............................. 3,389.1 2,718.7 210.0 2,928.7 86.5 2,534.5 86.5 1993 \2\............................. 3,522.4 2,796.3 224.8 3,021.1 85.8 2,635.8 87.2 1994 \2\............................. 3,756.8 2,986.3 243.1 3,229.4 86.0 2,818.5 87.3 ---------------------------------------------------------------------------------------------------------------- \1\ Sum of wages and salaries and proprietors' income with inventory valuation and capital consumption adjustments, as estimated by the Bureau of Economic Analysis in the National Income and Product Accounts. \2\ Preliminary. Source: Social Security Administration (1995) and Office of Research and Statistics, Social Security Administration. While coverage is compulsory for most types of employment, approximately 6.7 million workers did not have any coverage under Social Security in 1994. The majority of these noncovered workers were and still are in State and local governments or the Federal Government (see tables 1-4 and 1-5 for the most recently available statistical breakout). Beginning January 1, 1983, Federal employees were covered under the Medicare (HI) portion of the Social Security tax, and all Federal employees hired after 1983 are covered under the OASDI portion as well. In 1991, 70.2 percent of State and local government workers (14.4 million out of 20.5 million) were covered by Social Security. Beginning January 1, 1984, all employees of nonprofit organizations became covered, and as of April 1983 terminations of Social Security coverage by State government entities were no longer allowed. State and local employees hired after March 31, 1986 are mandatorily covered under the Medicare Program and must pay HI payroll taxes. Beginning July 1, 1991, State and local employees who were not members of a public retirement system were mandatorily covered under Social Security. This requirement was contained in the 1990 Omnibus Budget Reconciliation Act (Public Law 101-508). TABLE 1-4.--ESTIMATED SOCIAL SECURITY COVERAGE, 1994 ------------------------------------------------------------------------ Total Noncovered Percent (millions) (millions) covered ------------------------------------------------------------------------ Workers \1\...................... 145.5 6.7 95.4 Jobs: \2\ State and local government \3\......................... 21.7 5.5 74.7 Federal civilian............. 4.2 1.5 64.3 Students \4\................. 2.3 2.2 4.3 ------------------------------------------------------------------------ \1\ Includes both employees and self employed. \2\ Because workers may work at more than one job during the year, the total number of noncovered jobs exceeds the total number of noncovered workers. Because this table includes workers who worked only in a noncovered job at any time during the year, it shows a higher number of noncovered jobs than does table 1-2, which is based on coverage status in December of each year. \3\ Excludes students. \4\ Includes students employed at both public and private colleges and universities. Source: Social Security Administration. While the most recent year for which actual data are available is 1991, the Social Security Administration estimates that in 1994, 23.2 million individuals will work at some time during the year for a State or local government, and the wages of 70 percent of these individuals will be covered by Social Security. TABLE 1-5.--ESTIMATED SOCIAL SECURITY COVERAGE OF WORKERS WITH STATE OR LOCAL GOVERNMENT EMPLOYMENT, 1991 [Based on 1-percent sample; numbers in thousands] ------------------------------------------------------------------------ All workers Covered Percent State \1\ workers covered ------------------------------------------------------------------------ Alabama.............................. 350 316 90 Alaska............................... 81 32 40 Arizona.............................. 349 309 89 Arkansas............................. 192 173 90 California........................... 2,194 916 42 Colorado............................. 326 110 34 Connecticut.......................... 252 165 65 Delaware............................. 65 50 77 Florida.............................. 983 859 87 Georgia.............................. 574 448 78 Hawaii............................... 105 80 76 Idaho................................ 113 106 94 Illinois............................. 981 499 51 Indiana.............................. 434 372 86 Iowa................................. 270 230 85 Kansas............................... 250 222 89 Kentucky............................. 319 239 75 Louisiana............................ 398 119 30 Maine................................ 110 48 44 Maryland............................. 396 345 87 Massachusetts........................ 325 43 13 Michigan............................. 784 664 85 Minnesota............................ 414 326 79 Mississippi.......................... 220 194 88 Missouri............................. 381 295 77 Montana.............................. 93 77 83 Nebraska............................. 160 142 89 Nevada............................... 89 25 28 New Hampshire........................ 88 74 84 New Jersey........................... 580 544 94 New Mexico........................... 172 136 79 New York............................. 1,673 1,491 89 North Carolina....................... 562 504 90 North Dakota......................... 70 61 87 Ohio................................. 850 32 4 Oklahoma............................. 278 244 88 Oregon............................... 259 232 90 Pennsylvania......................... 733 674 92 Rhode Island......................... 73 54 74 South Carolina....................... 310 278 90 South Dakota......................... 74 66 89 Tennessee............................ 397 324 82 Texas................................ 1,316 729 55 Utah................................. 161 144 89 Vermont.............................. 54 52 96 Virginia............................. 508 467 92 Washington........................... 428 361 84 West Virginia........................ 150 122 81 Wisconsin............................ 451 376 83 Wyoming.............................. 66 56 85 ---------------------------------- Total.......................... 20,461 14,425 70 ------------------------------------------------------------------------ \1\ Includes seasonal and part-time workers for whom State and local government employment was not their major job. Source: Office of Research and Statistics, Social Security Administration. BENEFITS Eligibility for Workers Insured status Benefits can be paid to workers, and their dependents or survivors, only if the worker has worked long enough in covered employment to be ``insured'' for these benefits. Insured status is measured in terms of ``quarters of coverage.'' Before 1978, one quarter of coverage was earned for each calendar quarter in which a worker was paid $50 or more in wages for covered employment (except for agricultural labor). Since the beginning of 1978 the crediting of quarters of coverage has been on an annual rather than a quarterly basis up to a maximum of four quarters of coverage per year. In 1978, a worker earned one quarter of coverage (up to a maximum of four) for each $250 of annual earnings reported from covered employment or self-employment. The amount of annual earnings needed for a quarter of coverage is increased each year in proportion to increases in average wages in the economy. In 1996 the amount of earnings needed for a quarter of coverage is $640. Table 1-6 shows amounts needed since 1978. TABLE 1-6.--AMOUNT OF COVERED WAGES NEEDED TO EARN ONE QUARTER OF COVERAGE SINCE 1978 1978....................................................... $250 1979....................................................... 260 1980....................................................... 290 1981....................................................... 310 1982....................................................... 340 1983....................................................... 370 1984....................................................... 390 1985....................................................... 410 1986....................................................... 440 1987....................................................... 460 1988....................................................... 470 1989....................................................... 500 1990....................................................... 520 1991....................................................... 540 1992....................................................... 570 1993....................................................... 590 1994....................................................... 620 1995....................................................... 630 1996....................................................... 640 1997....................................................... \1\ 670 1998....................................................... \1\ 690 1999....................................................... \1\ 720 2000....................................................... \1\ 750 2001....................................................... \1\ 780 ------------------------------------------------------------------------ \1\ Based on economic assumptions in the 1996 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds. Source: Office of the Actuary, Social Security Administration. For the purpose of the OASI Program, there are two types of insured status: ``fully insured'' and ``currently insured.'' Workers are fully insured for benefits for themselves and for their eligible dependents if they have earned one quarter of coverage for each year elapsing after the year they reached age 21 up to the year in which they reach age 62, become disabled, or die. Fully-insured status is required for eligibility for all types of benefits except certain survivor benefits. No matter how young, a worker must have at least six quarters of coverage to be fully insured, with the minimum number increasing with age. A worker with 40 quarters of coverage is fully insured for life. Survivors of a worker who was not fully insured may still be eligible for benefits if the worker was currently insured. Workers are currently insured if they have six quarters of coverage during the thirteen calendar quarters ending with the quarter in which they died. Workers are insured for disability if they are fully insured and have a total of at least 20 quarters of coverage during the 40-quarter period ending with the quarter in which they became disabled. Workers who are disabled before age 31 are insured for disability if they have total quarters of coverage equal to half the calendar quarters which have elapsed since the worker reached age 21, ending in the quarter in which they became disabled. However, a minimum of 6 quarters of coverge is required. Age Workers must be at least age 62 to be eligible for retirement benefits. There is no minimum age requirement for disability benefits, but disabled workers who attain the ``full retirement age'' (see below) automatically receive full retirement benefits, rather than disability benefits. Disability benefits are computed as if the worker reached full retirement age on the day he became totally disabled. Disability Definition Generally, disability is defined as the inability to engage in substantial gainful activity by reason of a physical or mental impairment. The impairment must be medically determinable and expected to last for not less than 12 months, or to result in death. Applicants may be determined to be disabled only if, due to such an impairment, they are unable to engage in any kind of substantial gainful work, considering their age, education, and work experience. The work need not exist in the immediate area in which the applicant lives, nor must a specific job vacancy exist for the individual. Moreover, no showing is required that the worker would be hired for the job if she applied. There are special definition and eligibility requirements for persons who are blind, which are described in the section on ``Determination of Disability Benefits.'' The Commissioner \1\ has specific regulatory authority to prescribe the criteria for determining when earnings derived from employment demonstrate an individual's ability to engage in substantial gainful activity (SGA). --------------------------------------------------------------------------- \1\ Throughout the remainder of this section when Commissioner is used, it is the Commissioner of Social Security. --------------------------------------------------------------------------- Effective January 1, 1990, the SGA earnings level was raised to $500 a month (net of impairment-related work expenses), based on regulations published by the Commissioner. Table 1-7 shows SGA amounts applicable to nonblind disabled workers since 1968. TABLE 1-7.--MONTHLY SGA AMOUNTS SINCE 1968 ------------------------------------------------------------------------ Year SGA ------------------------------------------------------------------------ July 1968-73.................................................... $140 1974-75......................................................... 200 1976............................................................ 230 1977............................................................ 240 1978............................................................ 260 1979............................................................ 280 1980-89......................................................... 300 1990 and thereafter............................................. 500 ------------------------------------------------------------------------ Source: Office of Research and Statistics, Social Security Administration. Waiting period An initial 5-month waiting period is required before DI benefits are paid. Benefits are payable beginning with the sixth full month of disability. However, benefits may be paid for the first full month of disability to a worker who becomes disabled within 60 months after termination of DI benefits from an earlier period of disability (for a disabled widow or widower the period is 84 months). Work incentive provisions The law provides a 45-month period for disabled beneficiaries to test their ability to work without losing their entitlement to all benefits. The period consists of (1) a ``trial work period'' (TWP), which allows disabled beneficiaries to work for up to 9 months (within a 5-year period) \2\ with no effect on their disability or Medicare benefits; followed by (2) a 36-month ``extended period of eligibility,'' during the last 33 of which cash disability benefits are suspended for any month in which the individual is engaged in SGA. Medicare coverage continues so long as the individual remains entitled to disability benefits and, depending on when the last month of SGA occurs, may continue for 3 to 24 months after entitlement to disability benefits ends. When Medicare entitlement ends because of the individual's work activity, but she is still medically disabled, she may purchase Medicare protection. --------------------------------------------------------------------------- \2\ Only one TWP is allowed in any one period of disability. The TWP is completed only if the 9 months are within a 60-month period. By regulation, earnings of more than $200 a month constitute ``trial work.'' --------------------------------------------------------------------------- If beneficiaries medically recover to the extent that they no longer meet the definition of disability, disability and Medicare benefits are terminated 3 months thereafter, regardless of the status of their trial work period or extended period of eligibility. However, persons who contest this determination may elect to continue to receive disability benefits (subject to recovery) and Medicare benefits while their appeal is being reviewed. Eligibility for Dependents and Survivors Dependents' benefits are payable in addition to benefits payable to the worker. Spouse's benefit A benefit is payable to a spouse of a retired or disabled worker under one of the following conditions: (1) currently- married spouse is at least 62 or is caring for one or more of the worker's entitled children who are disabled or have not reached age 16; or (2) divorced spouse is at least 62, is not married, and the marriage had lasted at least 10 years before the divorce became final. A divorced spouse may be entitled independently of the worker's retirement if both the worker and divorced spouse are age 62, and if the divorce has been final for at least 2 years. Widow(er)'s benefit A monthly survivor benefit is payable to a widow(er) or divorced spouse of a worker who was fully insured at the time of death. The widow(er) or divorced spouse must be unmarried (unless the remarriage occurred after the widow(er) first became eligible for benefits as a widow(er)); and must be either (a) age 60 or older or (b) age 50-59 and disabled throughout a waiting period of 5 consecutive calendar months that began no later than 7 years after the month the worker died or after the end of his or her entitlement to benefits as a widowed mother or father. Child's benefit A monthly benefit is payable to an unmarried child, or eligible dependent grandchild, of a retired, disabled, or deceased worker who was fully or currently insured at death. The child or grandchild must be either: (1) under age 18; (2) a full-time elementary or secondary student under age 19; or (3) a disabled person age 18 or over whose disability began before age 22. A grandchild is eligible for benefits on a grandparent's earnings record if the grandchild was adopted by the grandparent and may be entitled under certain circumstances if there is no adoption. If adopted by the surviving spouse of that grandparent, the child would be eligible if he lived with or received one-half support from the grandparent prior to the grandparent's death. Mother's/father's benefit A monthly survivor benefit is payable to a mother (father) or surviving divorced mother (father) if: (1) the deceased worker on whose account the benefit is payable was fully or currently insured at time of death and (2) the mother (father) or surviving divorced mother (father) is not married and has one or more entitled children of the worker in his or her care. These payments continue as long as the youngest child being cared for is under age 16 or disabled (see ``Child's benefit'' above). Parent's benefit A monthly survivor benefit is payable to a parent, age 62 or over, of a deceased fully-insured worker. The worker must have been providing at least one-half of the parent's support. Lump-sum death benefit A one-time lump-sum benefit of $255 is payable upon the death of a fully or currently-insured worker to the surviving spouse who was living with the deceased worker or was eligible to receive monthly cash survivor benefits upon the worker's death. If there is no eligible spouse, the lump-sum death benefit is payable to any child of the deceased worker who is eligible to receive monthly cash benefits as a surviving child. If there is no surviving spouse, or children of the worker eligible for monthly benefits, then the lump-sum death benefit is not paid. [See table 1-7a for 1995 OASDI beneficiary statistics; table 1-7b for OASDI benefits paid 1940-95; table 1-7c for monthly benefit amounts for selected families; and the ``Benefit Computation'' section for further information on AIME.] TABLE 1-7a.--OASDI BENEFICIARIES IN CURRENT PAYMENT STATUS AND NEW AWARDS, DECEMBER 1995 ---------------------------------------------------------------------------------------------------------------- Number in Number of current Percent of Average new awards Average payment beneficiary monthly (in new award (thousands) population benefit thousands) ---------------------------------------------------------------------------------------------------------------- Retired workers..................................... 26,673 61.5 $720 1,609 $689 Wives and husbands of retired workers............... 3,026 7.0 370 259 334 Children of retired workers......................... 442 1.0 322 101 298 Disabled workers.................................... 4,185 9.6 682 646 694 Wives and husbands of disabled workers.............. 264 0.6 164 63 175 Children of disabled workers........................ 1,409 3.2 183 401 176 Widowed mothers and fathers......................... 275 0.6 478 52 464 Surviving children.................................. 1,884 4.3 469 306 464 Widows and widowers................................. 5,052 11.6 680 415 667 Disabled widow(er)s................................. 173 0.4 458 30 458 Parents............................................. 4 (\1\) 591 (\2\) 607 Special age-72...................................... 1 (\1\) 192 (\2\) 136 ----------------------------------------------------------- Totals and averages........................... 43,387 100.0 $649 3,382 $587 ---------------------------------------------------------------------------------------------------------------- \1\ Less than 0.05 percent. \2\ Fewer than 500. Source: Office of Research and Statistics, Social Security Administration. TABLE 1-7b.--OASDI BENEFITS PAID, 1940-95 [In millions of dollars] ------------------------------------------------------------------------ Year OASDI OASI DI ------------------------------------------------------------------------ 1940................................... $35 $35 ......... 1950................................... 961 961 ......... 1960................................... 11,245 10,677 $568 1970................................... 31,863 28,796 3,067 1980................................... 120,511 105,074 15,437 1985 \1\............................... 186,196 167,360 18,836 1990 \1\............................... 247,796 222,993 24,803 1991 \1\............................... 268,098 240,436 27,662 1992 \1\............................... 286,030 254,939 31,091 1993 \1\............................... 302,402 267,804 34,598 1994 \1\............................... 316,772 279,068 37,704 1995 \1\............................... 332,580 291,682 40,898 ------------------------------------------------------------------------ \1\ Unnegotiated checks not deducted. Source: Office of Research and Statistics, Social Security Administration. BENEFIT COMPUTATION All monthly benefits are computed based on a worker's primary insurance amount (PIA). The PIA is a monthly amount based on the application of the Social Security benefit formula to a worker's average lifetime covered earnings. It is also the monthly benefit amount payable to a worker who retires at the full retirement age, or becomes entitled to disability benefits. Full Retirement Age Benefits for retired workers, aged spouses and widow(er)s taken before the ``full retirement age'' are subject to an actuarial reduction. The full retirement age is the earliest age at which unreduced retirement benefits can be received. The full retirement age currently is age 65, but it will gradually rise in two steps beginning in the next century. First, the full retirement age will increase by 2 months for each year that a person is born after 1937, until it reaches age 66 for those who were born in 1943. Second, it will increase again by 2 months for each year that a person is born after 1954, until it reaches age 67 for those who were born after 1959. Early retirement still will be available, beginning at age 62 for workers and their spouses, and at age 60 for widow(er)s, but benefits will be lower. The actuarial reduction on retirement benefits at age 62 ultimately will be 30 percent, instead of the present 20 percent. The age for full benefits for aged spouses and widow(er)s likewise will rise to 67. Benefits of workers who choose to retire after their full retirement age are increased by ``delayed retirement credits,'' as are the benefits payable to their widow(er)s. The delayed retirement credit is 1 percent per year for workers who attained age 65 before 1982, and 3 percent per year for workers who attained age 65 between 1982 and 1989. Starting in 1990, the delayed retirement credit increases by one-half of 1 percent every other year until it reaches 8 percent for workers reaching age 65 after 2007 (see section on ``Benefit Reduction and Increase''). Table 1-8 shows the schedule of increases in the full retirement age and delayed retirement credits for workers. TABLE 1-7c.--MONTHLY BENEFIT AMOUNTS FOR SELECTED BENEFICIARY FAMILIES WITH FIRST ELIGIBILITY IN 1995, FOR SELECTED WAGE LEVELS, DECEMBER 1995 ------------------------------------------------------------------------ Worker with yearly earnings equal to ----------------------------------- Beneficiary family Federal Maximum minimum Average taxable wage \1\ wage \2\ earnings \3\ ------------------------------------------------------------------------ RETIRED WORKER FAMILIES: \4\ Average indexed monthly earnings.... $969.00 $1,929.00 $3,493.00 Primary insurance amount............ 571.50 886.70 1,238.70 Maximum family benefit.............. 873.70 1,618.70 2,167.60 Monthly benefit amount: Retired worker claiming benefits: Worker alone at age 62 \4\.... 457.00 709.00 990.00 Worker at age 62 with spouse \4\.......................... 671.00 1,041.00 1,454.00 Worker at age 65 with spouse.. 742.00 1,152.00 1,609.00 SURVIVOR FAMILIES: \5\ Average indexed monthly earnings.... 873.00 1,931.00 4,627.00 Primary insurance amount............ 540.00 887.40 1,413.30 Maximum family benefit.............. 810.10 1,619.70 2,473.00 Monthly benefit amount: Survivors of worker deceased at age 40: \5\ One surviving child........... 405.00 665.00 1,059.00 Widowed mother/father and one child........................ 810.00 1,330.00 2,118.00 Widowed mother/father and two children..................... 810.00 1,617.00 2,472.00 DISABLED WORKER FAMILIES: \6\ Average indexed monthly earnings.... 927.00 1,929.00 4,069.00 Primary insurance amount............ 557.80 886.70 1,327.40 Disability maximum family benefit \7\................................ 808.30 1,330.10 1,991.10 Monthly benefit amount: Disabled worker age 50: \6\ Worker alone.................. 557.00 886.00 1,327.00 Worker, spouse, and one child. 807.00 1,328.00 1,989.00 ------------------------------------------------------------------------ \1\ Annual earnings are calculated by multiplying the Federal minimum hourly wage ($4.25 when this table was prepared) by 2,080 hours. In 1996, Congress increased the minimum wage in two stages to $5.15 per hour as part of Public Law 104-188. This increase will be reflected in benefit calculations for this table beginning with the fourth quarter of 1996. \2\ Worker earned the national average wage in each year used in the computation of the benefit. \3\ Worker earned the maximum amount of wages that can be credited to a worker's Social Security record in all years used in the computation of the benefit. \4\ Assumes the worker began to work at age 22, retired at age 62 in 1995 with maximum reduction, and had no prior period of disability. \5\ Assumes the deceased worker began to work at age 22, died in 1995 at age 40, had no earnings in that year, and had no prior period of disability. \6\ Assumes the worker began work at age 22, became disabled at age 50, and had no prior disability. \7\ The 1980 amendments to the Social Security Act provide for different family maximum amount for disability cases. For disabled workers entitled after June 1980, the maximum is the smaller of (1) 85 percent of the worker's AIME (or 100 percent of the PIA, if larger) or (2) 150 percent of the PIA. Source: Social Security Administration. TABLE 1-8.--INCREASES IN FULL RETIREMENT AGE AND DELAYED RETIREMENT CREDITS, WITH RESULTING BENEFIT, AS A PERCENT OF PRIMARY INSURANCE AMOUNT [PIA], PAYABLE AT SELECTED AGES, FOR PERSONS BORN IN 1924 OR LATER -------------------------------------------------------------------------------------------------------------------------------------------------------- Credit for each Benefit, as a percent of PIA, beginning at age-- year of delayed --------------------------------------------------------- Year of birth Age 62 attained in-- ``Normal retirement retirement age'' after normal 62 65 66 67 70 retirement age -------------------------------------------------------------------------------------------------------------------------------------------------------- 1924............................. 1986................ 65.................. 3 80 100 103 106 115 1925-26.......................... 1987-88............. 65.................. 3\1/2\ 80 100 103\1/2\ 107 117\1/2\ 1927-28.......................... 1989-90............. 65.................. 4 80 100 104 108 120 1929-30.......................... 1991-92............. 65.................. 4\1/2\ 80 100 104\1/2\ 109 122\1/2\ 1931-32.......................... 1993-94............. 65.................. 5 80 100 105 110 125 1933-34.......................... 1995-96............. 65.................. 5\1/2\ 80 100 105\1/2\ 111 127\1/2\ 1935-36.......................... 1997-98............. 65.................. 6 80 100 106 112 130 1937............................. 1999................ 65.................. 6\1/2\ 80 100 106\1/2\ 113 132\1/2\ 1938............................. 2000................ 65, 2 mo............ 6\1/2\ 79\1/6\ 98\8/9\ 105\5/12\ 111\11/12\ 131\5/12\ 1939............................. 2001................ 65, 4 mo............ 7 78\1/3\ 97\7/9\ 104\2/3\ 111\2/3\ 132\2/3\ 1940............................. 2002................ 65, 6 mo............ 7 77\1/2\ 96\2/3\ 103\1/2\ 110\1/2\ 131\1/2\ 1941............................. 2003................ 65, 8 mo............ 7\1/2\ 76\2/3\ 95\5/9\ 102\1/2\ 110 132\1/2\ 1942............................. 2004................ 65, 10 mo........... 7\1/2\ 75\5/6\ 94\4/9\ 101\1/4\ 108\3/4\ 131\1/4\ 1943-54.......................... 2005-16............. 66.................. 8 75 93\1/3\ 100 108 132 1955............................. 2017................ 66, 2 mo............ 8 74\1/6\ 92\2/9\ 98\8/9\ 106\2/3\ 130\2/3\ 1956............................. 2018................ 66, 4 mo............ 8 73\1/3\ 91\1/9\ 97\7/9\ 105\1/3\ 129\1/3\ 1957............................. 2019................ 66, 6 mo............ 8 72\1/2\ 90 96\2/3\ 104 128 1958............................. 2020................ 66, 8 mo............ 8 71\2/3\ 88\8/9\ 95\5/9\ 102\2/3\ 126\2/3\ 1959............................. 2021................ 66, 10 mo........... 8 70\5/6\ 87\7/9\ 94\4/9\ 101\1/3\ 125\1/3\ 1960 or later.................... 2022 or later....... 67.................. 8 70 86\2/3\ 93\1/3\ 100 124 -------------------------------------------------------------------------------------------------------------------------------------------------------- Source: Ballantyne (1984). Trends in Retirement Age Table 1-9 shows the percentage of workers who elected to receive retirement benefits at selected ages since the beginning of the Social Security Program. It clearly illustrates a trend toward early retirement. Retirement at age 62 has become the norm. Reduced benefits were not available to women until 1956, and to men until 1961. Table 1-10 shows the percentage of retired workers electing reduced benefits since they first became available. TABLE 1-9.--PERCENTAGE OF WORKERS ELECTING SOCIAL SECURITY RETIREMENT BENEFITS AT VARIOUS AGES SINCE 1940 \1\ ---------------------------------------------------------------------------------------------------------------- Ages 63- Ages Average Year Age 62 64 Age 65 66+ age ---------------------------------------------------------------------------------------------------------------- 1940............................................................... (\2\) (\2\) 8.3 91.7 68.8 1945............................................................... (\2\) (\2\) 17.9 82.1 69.6 1950............................................................... (\2\) (\2\) 23.1 76.9 68.7 1955............................................................... (\2\) (\2\) 41.2 58.8 68.4 1960............................................................... 10.0 7.9 35.3 46.7 66.8 1965............................................................... 23.0 17.7 23.4 35.9 65.8 1970............................................................... 27.8 23.2 36.9 12.1 64.4 1975............................................................... 35.7 24.5 31.1 8.7 64.0 1980............................................................... 40.5 22.2 30.7 6.6 63.9 1985............................................................... 57.2 21.1 17.7 4.0 63.7 1990............................................................... 56.6 20.2 16.6 6.7 63.7 1994............................................................... 58.9 20.0 15.7 5.4 63.6 ---------------------------------------------------------------------------------------------------------------- \1\ Excludes conversions at age 65 from disability to retirement rolls. \2\ Retirement before age 65 was not available. Source: Congressional Research Service and Social Security Administration. Trends in Longevity Table 1-11 shows how life expectancies have increased since Social Security benefits were first paid in 1940, and what they are projected to be in the future, as well as fertility and death rates. Average Indexed Monthly Earnings Except for workers who became eligible for benefits before 1984, or who are eligible for a ``Special Minimum Benefit'' (see below), the primary insurance amount (PIA) is determined through a formula applied to the worker's average indexed monthly earnings (AIME). The AIME is a dollar amount that represents the average monthly earnings from Social Security- covered employment over most of the worker's adult life indexed to the increase in average annual wages. Indexing the earnings to changes in wage levels ensures that the same relative value is accorded to wages no matter when earned. Because actual average-wage data take over a year to become available, past earnings are updated to the second calendar year (the ``indexing year'') before the worker becomes eligible for retirement (age 62) or, if earlier, becomes disabled or dies. This means that the year a worker turns age 60 is used as the indexing year for computing retirement benefits. Earnings in and after the indexing year are not indexed. TABLE 1-10.--NUMBER OF SOCIAL SECURITY RETIRED WORKER NEW BENEFIT AWARDS AND PERCENT RECEIVING REDUCED BENEFITS BECAUSE OF ENTITLEMENT BEFORE AGE 65, AS OF DECEMBER OF GIVEN YEAR \1\ [Numbers in millions] ---------------------------------------------------------------------------------------------------------------- Total Men Women Year \1\ ----------------------------------------------------- Number Percent Number Percent Number Percent ---------------------------------------------------------------------------------------------------------------- 1956...................................................... 0.9 12 0.6 ....... 0.4 31 1960...................................................... 1.0 21 0.6 ....... 0.4 60 1965...................................................... 1.2 49 0.7 43 0.4 60 1970...................................................... 1.3 63 0.8 57 0.5 72 1975...................................................... 1.5 73 0.9 69 0.6 79 1980...................................................... 1.6 76 0.9 73 0.7 80 1985...................................................... 1.7 74 1.0 70 0.7 79 1986...................................................... 1.7 74 1.0 71 0.7 79 1987...................................................... 1.7 74 1.0 71 0.7 79 1988...................................................... 1.6 74 0.9 70 0.7 78 1989...................................................... 1.7 73 1.0 69 0.7 78 1990...................................................... 1.7 74 1.0 71 0.7 78 1991...................................................... 1.7 72 1.0 69 0.7 76 1992...................................................... 1.7 72 1.0 69 0.7 76 1993...................................................... 1.7 72 1.0 70 0.7 75 1994...................................................... 1.6 73 0.9 70 0.7 76 1995...................................................... 1.6 72 0.9 69 0.7 75 ---------------------------------------------------------------------------------------------------------------- \1\ Data for 1985-90 based on a 1-percent sample; data for other years based on 100 percent. Includes conversions at age 65 from disability to retirement rolls. Source: Office of Research and Statistics, Social Security Administration. TABLE 1-11.--SELECTED DEMOGRAPHIC ASSUMPTIONS, 1940-2070 ---------------------------------------------------------------------------------------------------------------- Age-sex- Life expectancy \3\ adjusted ----------------------------------- Total death rate All birth At age 65 Calendar year fertility \2\ (per ----------------------------------- rate \1\ 100,000) Male Female Male Female ---------------------------------------------------------------------------------------------------------------- 1940............................................... 2.23 1,532.8 61.4 65.7 11.9 13.4 1945............................................... 2.42 1,366.4 62.9 68.4 12.6 14.4 1950............................................... 3.03 1,225.3 65.6 71.1 12.8 15.1 1955............................................... 3.50 1,134.2 66.7 72.8 13.1 15.6 1960............................................... 3.61 1,128.6 66.7 73.2 12.9 15.9 1965............................................... 2.88 1,103.6 66.8 73.8 12.9 16.3 1970............................................... 2.43 1,041.8 67.1 74.9 13.1 17.1 1975............................................... 1.77 934.0 68.7 76.6 13.7 18.0 1976............................................... 1.74 923.2 69.1 76.8 13.7 18.1 1977............................................... 1.79 898.0 69.4 77.2 13.9 18.3 1978............................................... 1.76 892.4 69.6 77.2 13.9 18.3 1979............................................... 1.82 864.2 70.0 77.7 14.2 18.6 1980............................................... 1.85 878.1 69.9 77.5 14.0 18.4 1981............................................... 1.83 853.8 70.4 77.8 14.2 18.6 1982............................................... 1.83 828.5 70.8 78.2 14.5 18.8 1983............................................... 1.81 836.1 70.9 78.1 14.3 18.6 1984............................................... 1.80 829.6 71.1 78.2 14.4 18.7 1985............................................... 1.84 831.8 71.1 78.2 14.4 18.6 1986............................................... 1.84 824.8 71.1 78.3 14.5 18.7 1987............................................... 1.87 816.1 71.3 78.4 14.6 18.7 1988............................................... 1.93 824.5 71.2 78.3 14.6 18.7 1989............................................... 2.01 804.1 71.5 78.6 14.8 18.9 1990............................................... 2.07 789.0 71.8 78.8 15.0 19.0 1991............................................... 2.07 778.8 71.9 78.9 15.1 19.1 1992 \4\........................................... 2.06 764.3 72.2 79.2 15.2 19.3 1993 \4\........................................... 2.04 784.2 71.9 78.9 15.1 19.0 1994 \4\........................................... 2.04 775.9 72.2 79.0 15.3 19.0 1995 \4\........................................... 2.04 763.8 72.3 79.2 15.4 19.2 1996............................................... 2.03 757.0 72.5 79.3 15.4 19.2 2000............................................... 2.02 731.3 73.0 79.7 15.6 19.4 2005............................................... 1.99 700.5 73.9 80.2 15.9 19.5 2010............................................... 1.96 677.3 74.5 80.5 16.1 19.7 2015............................................... 1.93 657.4 74.9 80.9 16.3 19.9 2020............................................... 1.90 638.4 75.3 81.2 16.5 20.1 2025............................................... 1.90 620.4 75.6 81.5 16.7 20.3 2030............................................... 1.90 603.2 76.0 81.8 16.9 20.5 2035............................................... 1.90 587.0 76.3 82.1 17.1 20.7 2040............................................... 1.90 571.5 76.6 82.4 17.3 21.0 2045............................................... 1.90 556.7 76.9 82.7 17.5 21.2 2050............................................... 1.90 542.7 77.2 83.0 17.7 21.4 2055............................................... 1.90 529.3 77.5 83.3 17.9 21.6 2060............................................... 1.90 516.5 77.8 83.6 18.0 21.8 2065............................................... 1.90 504.3 78.1 83.8 18.2 22.0 2070............................................... 1.90 492.6 78.4 84.1 18.4 22.2 ---------------------------------------------------------------------------------------------------------------- \1\ The total fertility rate for any year is the average number of children who would be born to a woman in her lifetime if she were to experience the birth rates by age observed in, or assumed for, the selected year, and if she were to survive the entire childbearing period. The ultimate total fertility rate is assumed to be reached in 2020. \2\ The age-sex-adjusted death rate is the crude rate that would occur in the enumerated total population as of April 1, 1980, if that population were to experience the death rates by age and sex observed in, or assumed for, the selected year. \3\ The life expectancy for any year is the average number of years of life remaining for a person if that person were to experience the death rates by age observed in, or assumed for, the selected year. \4\ Preliminary or estimated. Source: Board of Trustees (1996), intermediate assumptions. There are several steps in determining the AIME: (1) the ``index'' for a worker's earnings is determined by multiplying the earnings for a given year by the ratio of the average wage for the indexing year divided by the average wage for that year; and (2) the number of ``computation years'' is based on the number of years elapsing after 1950 (or year of attainment of age 21, if later) up to the year the worker attains age 62, becomes disabled, or dies, minus any ``dropout'' years. There are five dropout years in retirement and survivor computations (for workers disabled before age 47, the number of dropout years varies from one to four, depending on the worker's age and number of child care dropout years). The minimum number of computation years is two. The computation years are selected from the highest indexed yearly earnings in all years of earnings after 1950, up to a maximum of 35 years. (The highest 35 years are selected in computing retirement benefits for all workers born after 1929.) The sum of the indexed earnings in the selected years is divided by the number of months in the computation period (i.e, the number of the selected years times 12) to determine the AIME. The indexed earnings histories (rounded to whole dollars) are illustrated in table 1-12 for three hypothetical workers retiring in 1996 at age 62. The actual earnings for the three workers are shown in the first three columns. These are multiplied by the indexing factor (column 4) to arrive at indexed earnings (last 3 columns of table 1-12). The indexing factor for 1960 is based on average wages when the individual turned 60 ($23,753.53), divided by average wages for 1960 ($4,007.12). The highest 35 years of indexed earnings are used. For example, a lifelong full-time worker who had maximum creditable earnings would drop low earnings in 1958, 1962, 1963, 1964, and 1965, and would have total indexed earnings of $1,536,031 (see table 1-12). Dividing this by the number of months in the computation period (35 years 12 months = 420 months) results in average indexed monthly earnings (AIME) of $3,657. The corresponding AIMEs for the average and low earners are $1,981 and $891, respectively. Low earners are defined as earning 45 percent of the average wage. Benefit Formula The Primary Insurance Amount (PIA) is determined by applying the ``primary benefit formula'' to the AIME. For a worker becoming eligible in 1996, the PIA is determined as follows: ------------------------------------------------------------------------ Average indexed monthly Factor earnings ------------------------------------------------------------------------ 90 percent................................ first $437, plus 32 percent................................ $437 through $2,635, plus 15 percent................................ over $2,635 ------------------------------------------------------------------------ Applying this formula to the AIMEs of the three hypothetical workers results in PIAs of $538.50 for the low- wage worker, $887.30 for the average-wage worker, and $1,249.90 for the maximum-wage worker. (For the low-wage worker, the 1996 special minimum benefit (see below) PIA of $532.90 is less than AIME-based PIA of $538.50, and therefore is not used to determine his or her benefits.) The numbers $437 and $2,635 are often referred to as ``bend points'' of the PIA formula. These are adjusted each year by the change in average wages. After the year of initial eligibility (age 62 for retired workers), the PIA is increased each year for the increase in the Consumer Price Index (CPI). The PIAs of $538.50, $887.30, and $1,249.90 would be in effect for January through November 1996, and will be increased by the cost-of-living adjustment effective beginning December 1996. TABLE 1-12.--EARNINGS HISTORIES FOR HYPOTHETICAL WORKERS AGE 62 IN 1996 [Rounded to nearest dollar] ---------------------------------------------------------------------------------------------------------------- Nominal earnings Indexed earnings Year ------------------------------------ Indexing ----------------------------------- Low \1\ Average \2\ Maximum \3\ factor Low \1\ Average \2\ Maximum \3\ ---------------------------------------------------------------------------------------------------------------- 1956.......................... 1,590 3,532 4,200 6.7245 \4\ 10,6 89 \4\ 23,754 28,243 1957.......................... 1,639 3,642 4,200 6.5226 \4\ 10,6 89 \4\ 23,754 27,395 1958.......................... 1,653 3,674 4,200 6.4657 \4\ 10,6 89 \4\ 23,754 \4\ 27,156 1959.......................... 1,735 3,856 4,800 6.1605 \4\ 10,6 89 \4\ 23,754 29,570 1960.......................... 1,803 4,007 4,800 5.9278 \4\ 10,6 89 \4\ 23,754 28,454 1961.......................... 1,839 4,087 4,800 5.8123 10,689 23,754 27,899 1962.......................... 1,931 4,291 4,800 5.5351 10,689 23,754 \4\ 26,569 1963.......................... 1,978 4,397 4,800 5.4027 10,689 23,754 \4\ 25,933 1964.......................... 2,059 4,576 4,800 5.1905 10,689 23,754 \4\ 24,915 1965.......................... 2,096 4,659 4,800 5.0987 10,689 23,754 \4\ 24,474 1966.......................... 2,222 4,938 6,600 4.8100 10,689 23,754 31,746 1967.......................... 2,346 5,213 6,600 4.5562 10,689 23,754 30,071 1968.......................... 2,507 5,572 7,800 4.2632 10,689 23,754 33,253 1969.......................... 2,652 5,894 7,800 4.0303 10,689 23,754 31,436 1970.......................... 2,784 6,186 7,800 3.8397 10,689 23,754 29,950 1971.......................... 2,924 6,497 7,800 3.6560 10,689 23,754 28,517 1972.......................... 3,210 7,134 9,000 3.3297 10,689 23,754 29,967 1973.......................... 3,411 7,580 10,800 3.1336 10,689 23,754 33,843 1974.......................... 3,614 8,031 13,200 2.9578 10,689 23,754 39,043 1975.......................... 3,884 8,631 14,100 2.7521 10,689 23,754 38,805 1976.......................... 4,152 9,226 15,300 2.5745 10,689 23,754 39,390 1977.......................... 4,401 9,779 16,500 2.4289 10,689 23,754 40,077 1978.......................... 4,750 10,556 17,700 2.2502 10,689 23,754 39,829 1979.......................... 5,166 11,479 22,900 2.0692 10,689 23,754 47,385 1980.......................... 5,631 12,513 25,900 1.8982 10,689 23,754 49,164 1981.......................... 6,198 13,773 29,700 1.7246 10,689 23,754 51,222 1982.......................... 6,539 14,531 32,400 1.6346 10,689 23,754 52,962 1983.......................... 6,858 15,239 35,700 1.5587 10,689 23,754 55,646 1984.......................... 7,261 16,135 37,800 1.4722 10,689 23,754 55,648 1985.......................... 7,570 16,823 39,600 1.4120 10,689 23,754 55,916 1986.......................... 7,795 17,322 42,000 1.3713 10,689 23,754 57,595 1987.......................... 8,292 18,427 43,800 1.2891 10,689 23,754 56,462 1988.......................... 8,700 19,334 45,000 1.2286 10,689 23,754 55,286 1989.......................... 9,045 20,100 48,000 1.1818 10,689 23,754 56,726 1990.......................... 9,463 21,028 51,300 1.1296 10,689 23,754 57,949 1991.......................... 9,815 21,812 53,400 1.0890 10,689 23,754 58,154 1992.......................... 10,321 22,935 55,500 1.0357 10,689 23,754 57,480 1993.......................... 10,410 23,133 57,600 1.0268 10,689 23,754 59,146 1994.......................... 10,689 23,754 60,600 1.0000 10,689 23,754 60,600 1995.......................... \5\ 11,1 03 \5\ 24,673 61,200 1.0000 \5\ 11,1 03 \5\ 24,673 61,200 ---------------------------------------------------------------------------------------------------------------- \1\ Worker with earnings equal to 45 percent of the Social Security average wage index. \2\ Worker with earnings equal to the Social Security average wage index. \3\ Worker with earnings equal to the Social Security maximum taxable earnings. \4\ Dropout years. \5\ Estimated. Source: Office of the Actuary, Social Security Administration. The PIA is recomputed after each year that an entitled worker has earnings that may lead to a higher benefit. Other methods for determining a PIA also exist, and PIAs based on different methods must be compared to select the highest one, which is used to determine the worker's benefits. The most common of these other methods is the one used to determine the special minimum PIA. This PIA is designed to assist workers with long-term low earnings. Special Minimum Benefit The special minimum benefit is not based on the amount of a worker's average earnings, but instead on his or her number of years of covered employment. It is structured to provide a larger benefit than would otherwise be payable to those who worked in covered employment for many years but had low earnings. The amount of the special minimum is computed by multiplying the number of years of coverage in excess of 10 years and up to 30 years by $11.50 for monthly benefits payable in 1979, with automatic cost-of-living increases applicable to years 1979 and later. The number of years of coverage for the purpose of qualifying for a special minimum benefit equals the number obtained by dividing total creditable wages in 1937-50 by $900 (not to exceed 14), plus the number of years after 1950 and before 1991 for which the worker is credited with at least 25 percent of the annual maximum taxable earnings. For this purpose, for years after 1978, annual maximum taxable earnings are defined as the ``old-law'' taxable earnings base (i.e., the hypothetical earnings base that would be in effect if the ad hoc increases in the base enacted in 1977 were disregarded). In addition, for years after 1990, a year of coverage is earned if the worker is credited with at least 15 percent of the ``old- law'' taxable earnings base. The special minimum benefit is not subject to the delayed retirement credit provisions described earlier. BENEFIT AMOUNTS The monthly benefit amount payable to a disabled worker under age 65, or to a retired worker who first receives benefits at the full retirement age, is the PIA rounded to the next lower dollar, if not already a multiple of $1. Auxiliary benefit amounts are also based on the worker's PIA. Table 1-13 lists major types of benefits and the percent of the insured worker's PIA that is applicable to benefits paid at the full rate, unreduced for early election of retirement. REPLACEMENT RATES Frequently, Social Security benefits are discussed in terms of how much of a person's preretirement earnings the benefits represent. Benefits expressed as a percent of a person's earnings in the year before retirement are called replacement rates. Table 1-14 shows replacement rates based on the benefits of hypothetical workers who retired at the full retirement age after full-time careers with steady earnings equal to: (1) 45 percent of average earnings in the economy as recorded through the Social Security average wage index (low earner); (2) 100 percent of average earnings in the economy (average earner); and (3) the Social Security maximum taxable earnings base (maximum earner). TABLE 1-13.--PERCENTAGE OF PRIMARY INSURANCE AMOUNT (PIA) PAID FOR DEPENDENTS' AND SURVIVORS' BENEFITS ------------------------------------------------------------------------ Percent Type of monthly benefit of PIA ------------------------------------------------------------------------ Dependents: \1\ Wives, husbands--age 65..................................... \3\ 50.0 Mothers, fathers, children, grandchildren................... 50.0 Survivors: \1\ Widows, widowers--age 65 \2\................................ \3\ 100. 0 Dependent parent--age 62.................................... 82.5 Widows, widowers--age 60; disabled--ages 50-59.............. 71.5 Mothers, fathers, children.................................. 75.0 ------------------------------------------------------------------------ \1\ Subject to maximum family benefit limitation. \2\ Subject to general limitation that the survivor cannot get a higher benefit than the deceased worker would be getting if alive. \3\ These percentages decrease as the full retirement age increases for workers born after 1937. Source: Congressional Research Service. BENEFIT REDUCTION AND INCREASE Social Security benefits may be reduced, withheld, or increased for various reasons. Dual Entitlement An individual may be entitled to benefits both as a worker, based on his or her own earnings, and also as a dependent (spouse or widow(er)) of another worker. In these cases, the individual does not collect both benefits. The amount of the benefit as a spouse or widow(er) is offset dollar for dollar by the amount of any benefit the individual is entitled to as a worker. In other words, she first always receives the benefit based on his or her work record, and the dependent benefit is payable only to the extent it is greater than the worker benefit. In effect, the total amount ``dually entitled'' recipients receive is equal to the larger of the two benefits. Actuarial Reduction This term is used to signify that the reduction imposed on ``early retirement'' benefits is approximately one that will, if the recipient lives a normal lifespan, lead to the same total lifetime benefits as would be paid if the person chose ``full retirement'' benefits. It applies to: entitlement before the full retirement age for retired workers; spouses (including divorced spouses) of a retired or disabled worker (if entitlement is not based on having a child beneficiary in their care); and widows, widowers, and surviving divorced spouses. At the time of initial entitlement, reductions in benefit amounts are made for these benefit categories, as described below. TABLE 1-14.--SOCIAL SECURITY REPLACEMENT RATES, 1940-2040 [In percent] ---------------------------------------------------------------------------------------------------------------- Year of Replacement rates \1\ attaining ----------------------------------- Year of birth normal retirement Low earner Average Maximum age \2\ \3\ earner \4\ earner \5\ ---------------------------------------------------------------------------------------------------------------- 1875............................................................ 1940 39.4 26.2 16.5 1885............................................................ 1950 33.2 19.7 21.2 1895............................................................ 1960 49.1 33.3 29.8 1900............................................................ 1965 45.6 31.4 32.9 1905............................................................ 1970 48.5 34.3 29.2 1910............................................................ 1975 \7\ 59.9 42.3 30.1 1911............................................................ 1976 60.1 43.7 32.1 1912............................................................ 1977 61.0 44.8 33.5 1913............................................................ 1978 63.4 46.7 34.7 1914............................................................ 1979 64.4 48.1 36.1 1915............................................................ 1980 68.1 51.1 32.5 1916............................................................ 1981 72.5 54.4 33.4 1917............................................................ 1982 \6\ 65.8 \6\ 48.7 \6\ 28.6 1918............................................................ 1983 \7\ 63.5 45.8 26.3 1919............................................................ 1984 \7\ 62.6 42.8 23.7 1920............................................................ 1985 \7\ 61.1 40.9 22.8 1921............................................................ 1986 \7\ 60.3 41.1 23.1 1922............................................................ 1987 \7\ 59.5 41.2 22.6 1923............................................................ 1988 \7\ 58.4 40.9 23.0 1924............................................................ 1989 \7\ 57.9 41.6 24.1 1925............................................................ 1990 58.2 43.2 24.5 1935............................................................ 2000 57.1 42.4 25.6 1945............................................................ 2011 56.2 41.9 27.2 1955............................................................ 2021 56.2 41.8 27.8 1965............................................................ 2032 56.0 41.8 27.7 1975............................................................ 2042 56.0 41.8 27.6 ---------------------------------------------------------------------------------------------------------------- \1\ Total monthly benefits payable for year of entitlement at normal retirement age expressed as percent of earnings in year prior to entitlement for workers with steady career earnings. Projections for 1996 and later are based on the intermediate II assumptions of the 1996 OASDI Trustees' Report. \2\ Normal retirement age will rise from 65 starting with workers who attain age 62 in 2000 and will ultimately reach 67 for workers attaining age 62 in 2022 and later. \3\ Earnings equal to 45 percent of the ``Social Security average-wage index.'' \4\ Earnings equal to the ``Social Security average-wage index.'' \5\ Earnings equal to the maximum wage taxable for Social Security purposes. \6\ ``Transition guarantee'' under 1977 amendments. \7\ Special minimum benefit. Source: Office of the Actuary, Social Security Administration. Retired workers Today, the reduction rate is five-ninths of 1 percent for each month of entitlement before age 65 (maximum reduction of 20 percent). Workers retiring today at age 62 therefore receive 80 percent of the PIA. Although the minimum age of eligibility for reduced benefits remains age 62 (age 60 for widows and widowers), the increase in the full retirement age will be accompanied by increases in the amount of reduction for retirement at age 62 for individuals born after 1937. For them, the PIA will be reduced by five-twelfths of 1 percent for each month in excess of 36. For example, for persons born from 1943 through 1954, for whom the normal retirement age will be 66, the benefit payable at age 62 will be 75 percent of the PIA. For persons born in 1960 and later, for whom the normal retirement age will be 67, the benefit payable at age 62 will be 70 percent of the PIA (see table 1-8). Spouses The current reduction rate is twenty-five thirty-sixths of 1 percent for each month of entitlement before full retirement age. The maximum reduction is 25 percent. For spouses born after 1937, the benefit will be reduced by five-twelfths of 1 percent for each month of early retirement in excess of 36 months. Widow(er)s Today, the rate of reduction is nineteen-fortieths of 1 percent for each month of entitlement between age 60 and age 65 (maximum reduction of 28.5 percent). There is no scheduled increase in the maximum reduction for widow(er)s. Disabled widow(er)s ages 50 to 59 receive 71.5 percent of the PIA. Generally benefits continue to be paid at these reduced rates for as long as the recipients remain on the rolls. However, at attainment of the full retirement age for all recipients, and also at age 62 for a widow, widower, and a surviving divorced spouse, the number of months of reduction is adjusted by dropping months for which full benefits were not paid. Data on benefits paid to new retired workers in 1995 indicates that 72 percent of all such benefits were actuarially reduced (69 percent of those payable to men, and 75 percent to women). Table 1-10 presents information on the number of workers retiring in a given year who file for actuarially reduced benefits. Delayed Retirement Credit A worker is eligible for a delayed retirement credit (DRC) for each month the worker: (1) was fully insured; (2) had attained full retirement age but was not yet age 70; and (3) did not receive benefits because the worker had not filed an application or was working. Each DRC increases the worker's monthly benefit by one-twelfth of 1 percent for workers who attained age 62 before 1979 and by one-fourth of 1 percent for workers attaining age 62 from 1979 through 1986 (unless the benefit is based on a special minimum PIA). The increase is applicable to the worker's monthly benefit amount but not to the PIA. Therefore, dependents' benefits are generally not affected. The exception is that an individual receiving benefits as a widow(er) or surviving divorced spouse is entitled, for months after May 1978, to the same increase that was applied to the benefit of the worker, or for which the worker was eligible at the time of death. As a result of the Social Security amendments of 1983, beginning with workers who attain age 65 in 1990 (i.e., age 62 in 1987) the increment for delaying retirement past the normal retirement age (DRC) will increase by one-half of 1 percent every second year until reaching 8 percent per year of delayed retirement for workers attaining age 65 after 2007 (see table 1-8). Maximum Family Benefit Old Age and Survivor Insurance (OASI) The maximum monthly amount that can be paid on a worker's earnings record varies with the PIA. For benefits payable on the earnings records of retired and deceased workers, the maximum varies from 150 to 188 percent of the PIA. The family maximum cannot be exceeded regardless of the number of recipients entitled on that earnings record. The family maximum is computed by adding fixed percentages of dollar amounts that are part of the PIA. For the family of a worker who turns 62 or dies in 1996, the total amount of benefits payable is limited to: 150 percent of the first $559 of PIA, plus; 272 percent of PIA from $559 through $806, plus; 134 percent of PIA from $806 through $1,052, plus; 175 percent of PIA over $1,052. The dollar amounts in this benefit formula (i.e., the ``bend points'') are adjusted annually by the same index used to update the bend points in the primary benefit formula. Whenever the total of the individual monthly benefits payable to all the recipients entitled on one earnings record exceeds the maximum, each dependent's or survivor's benefit is reduced in equal proportion to bring the total within the maximum. In computing the maximum family benefit for entitlements based on a single earnings record, any benefit payable to a divorced spouse or to a surviving divorced spouse is not included. Disability Insurance (DI) The maximum family benefit is the smaller of 85 percent of the worker's average indexed monthly earnings (AIME), or 150 percent of the worker's primary insurance amount (PIA). However, in no case can the benefit be less than 100 percent of the worker's PIA. Earnings Limit The earnings limit is a provision in the law that reduces benefits for nondisabled recipients who earn income from work above a certain amount. Variations of the earnings limit have been part of the Social Security Program since its beginning. In 1996, recipients under age 65 may earn up to $8,280 a year in wages or self-employment income without having their benefits affected. Those aged 65-69 can earn up to $12,500 a year. For earnings above these amounts, recipients under age 65 lose $1 of benefits for each $2 of earnings, and those age 65-69 lose $1 in benefits for every $3 of earnings. The earnings limit does not apply to recipients over age 69, or to those who are disabled. The earnings limits rise each year indexed to the rise in average wages in the economy. Beginning in 1996, the exempt amounts for those who have attained the full retirement age will be increased on an ad hoc basis, according to the following schedule: ------------------------------------------------------------------------ Year Exempt amount ------------------------------------------------------------------------ 1996.................................................... $12,500 1997.................................................... 13,500 1998.................................................... 14,500 1999.................................................... 15,500 2000.................................................... 17,000 2001.................................................... 25,000 2002.................................................... 30,000 ------------------------------------------------------------------------ These changes were included in Public Law 104-121 enacted on March 29, 1996. After 2002, the exempt amounts for those who have attained the full retirement age again will be adjusted to rise at the same rate as average wages in the economy. Before enactment of Public Law 104-121, about 1.4 million recipients lost some or all of their benefits because of the earnings limit each year. They represented about 4 percent of all recipients. Of recipients age 65-69, about 10 percent (925,999) were affected, and an additional 140,000 persons were estimated to be deterred from filing for benefits because of the earnings limit. Retired workers whose benefits are not paid due to the earnings limit for one or more months are compensated through future increases in their benefit amount known as delayed retirement credits, or DRCs (discussed earlier). For workers under age 65, their actuarial reduction factor is reduced. Beneficiaries age 65-69 get a DRC for each month benefits were not paid. Examples of effects of the earnings limit: 1. John--Age 63 with $4,000 in annual benefits before the earnings limit is applied: Earnings in 1996................................... $9,280 Exempt amount for under age 65..................... 8,280 ------------ Excess over exempt amount.......................... 1,000 Benefit reduction = 50 percent of excess........... 500 Benefits John will receive in 1996................. 3,500 2. Ida--Age 67 with $4,000 in annual benefits before the earnings limit is applied: Earnings in 1996................................... 13,100 Exempt amount for 65 and older..................... 12,500 ------------ Excess over exempt amount.......................... 600 Benefit reduction = 33\1/3\ percent of excess...... 200 Benefits Ida will receive in 1996.................. 3,800 The earnings limit does not apply to pensions, rents, dividends, interest, and other types of ``unearned'' income. These forms of income have always been exempted in order to encourage savings for retirement to supplement Social Security. History of the earnings limit The earnings limit was part of the original plan that led to Social Security. The 1935 report of the Committee on Economic Security appointed by President Franklin D. Roosevelt recommended that no benefits be paid before a person had ``retired from gainful employment.'' Initially, the Social Security Act provided that benefits would not be paid for any month in which the individual had received ``wages with respect to regular employment.'' Before any benefits were payable under the program, Congress modified this provision in the Social Security amendments of 1939. No benefits would be paid for any month in which wages from covered employment were $15 or more. This arrangement prevailed until 1950. The 1950 amendments extended Social Security coverage to the bulk of nonfarm self-employed workers. Because it was believed that many self-employed people never retired and therefore would never receive benefits, the 1950 act exempted persons age 75 and over from the earnings limit. In addition, in the first of many legislative actions to increase the amount of earnings permitted, allowable monthly income from wages was increased from $14.99 to $50. Over the years, the earnings limits, the affected ages, and the formulas for reducing benefits have been changed many times. Starting with the 1954 amendments, benefits were no longer totally withheld if the retiree had earnings above the monthly exempt amount. Instead, a reduced benefit was payable. In addition, the 1954 act exempted persons age 72 and over from the earnings limit. The 1972 amendments reduced benefits by $1 for every $2 of earnings above the exempt amount. The 1972 amendments also provided that, beginning in 1975, the exempt amounts would be ``indexed'' to rise at the same rate as wage growth. To compensate workers who did not receive benefits for months between ages 65 and 72, the amendments established the delayed retirement credit. In the consideration of major Social Security legislation in 1977, there was considerable pressure to eliminate the earnings limit for persons over age 65. As a compromise, the earnings limit was raised for persons age 65 and older, and since then two different exempt amounts have applied, one for those under full retirement age (currently age 65) and one for those between full retirement age and age 70. (The 1977 amendments also lowered from 72 to 70 the age at which the earnings limit would no longer apply, to be effective in 1982, later postponed until 1983.) In response to criticism that the monthly earnings limit discriminated in favor of workers who had substantial but irregular employment (e.g., teachers), Congress also eliminated the monthly limit except for the first year of retirement. In 1980, Congress extended the monthly limit to the year a dependent beneficiary became ineligible for benefits. As part of major legislation restoring financial integrity to the Social Security system in 1983, Congress made two liberalizations affecting persons who continue to work after attaining retirement age. The first provided that, beginning in 1990, beneficiaries who have attained the full retirement age will lose only $1 in benefits for each $3 in earnings above the exempt amount. The second increased the delayed retirement credit (DRC). Prior to the increase, the DRC was equal to one- fourth of 1 percent for each month (3 percent a year) beyond the full retirement age that a person did not receive benefits. Under the 1983 provision, the DRC increases gradually to two- thirds of 1 percent per month between 1990 and 2009 (8 percent a year). As a result of a legislative change in the Deficit Reduction Act of 1984, the Social Security Administration requests earlier reports of earnings from beneficiaries who are most likely to have earnings in excess of the exempt amount. As a result, these beneficiaries have their benefits reduced in the actual year that they have excess earnings, rather than receiving overpayments which must then be recouped later when they may no longer be working. On March 29, 1996, President Clinton signed H.R. 3136, the Contract with America Advancement Act of 1996 (Public Law 104- 121), which increases the Social Security earnings limit ``exempt amounts''--the amount of earnings Social Security recipients may earn before their benefits are reduced--for recipients between the ``full retirement age'' (currently age 65) and age 70. Their exempt amounts will increase gradually by higher amounts than under prior law over the period 1996-2000, and then more rapidly over the next 2 years, reaching $30,000 in 2002. Table 1-14a shows amounts exempt from the earnings limit since 1975. Earnings of retired workers Of 9.5 million recipients entitled to retired worker benefits who were under the age of 70 in 1993, about 3.5 million had earnings from work. Table 1-15 shows the distribution of the earnings of these workers. Offsets Offset for other public disability benefits When a worker receiving Social Security disability benefits also qualifies for other disability benefits that are provided by Federal, State or local governments or worker's compensation, any Social Security benefits payable to him or her and his or her family are reduced by the amount, if any, that the total monthly benefits payable under the two or more programs exceed 80 percent of average current earnings before he became disabled. Needs-tested benefits, Veterans' Administration disability benefits, and benefits based on public employment covered by Social Security are not subject to the provision. A worker's average current earnings for this purpose are the larger of (a) the average monthly earnings used for computing Social Security benefits, or (b) the average monthly earnings in employment or self-employment covered by Social Security during the 5 consecutive years of highest covered earnings after 1950, or (c) the average monthly earnings during the calendar year of highest covered earnings during a period consisting of the year in which disability began and the preceding 5 years without regard to the limitations which specify a maximum amount of earnings creditable for Social Security benefits. The combined payments after the reduction are never less than the total amount of the DI benefits payable before the reduction. In addition, the Social Security benefit after the reduction is increased by the full amount of the cost-of-living increase as applied to the unreduced benefit. Every 3 years the original amount of benefits subject to reduction is redetermined to reflect changes in average wage levels. If increases in average national wages would result in a higher benefit than that payable based on the original computation, the benefit is increased effective January of the redetermination year. TABLE 1-14a.--AMOUNTS EXEMPT FROM THE EARNINGS LIMIT, 1975-2002 ------------------------------------------------------------------------ Age 65 Year Under age and over 65 \2\ ------------------------------------------------------------------------ 1975.............................................. $2,520 $2,520 1976.............................................. 2,760 2,760 1977.............................................. 3,000 3,000 1978.............................................. 3,240 4,000 1979.............................................. 3,480 4,500 1980.............................................. 3,720 5,000 1981.............................................. 4,080 5,500 1982.............................................. 4,440 6,000 1983.............................................. 4,920 6,600 1984.............................................. 5,160 6,960 1985.............................................. 5,400 7,320 1986.............................................. 5,760 7,800 1987.............................................. 6,000 8,160 1988.............................................. 6,120 8,400 1989.............................................. 6,480 8,880 1990.............................................. 6,840 9,360 1991.............................................. 7,080 9,720 1992.............................................. 7,440 10,200 1993.............................................. 7,680 10,560 1994.............................................. 8,040 11,160 1995.............................................. 8,160 11,280 1996.............................................. 8,280 \3\ 12,50 0 1997.............................................. \1\ 8,640 \3\ 13,50 0 1998.............................................. \1\ 9,000 \3\ 14,50 0 1999.............................................. \1\ 9,360 \3\ 15,50 0 2000.............................................. \1\ 9,720 \3\ 17,00 0 2001.............................................. \1\ 10,08 0 \3\ 25,00 0 2002.............................................. \1\ 10,56 0 \3\ 30,00 0 ------------------------------------------------------------------------ \1\ Based on economic assumptions in the 1996 Annual Report of the Board of Trustees of the Federal Old-Age, Survivors, and Disability Insurance Trust Funds. \2\ From 1955 to 1982, earnings limits did not apply at ages 72 and over; beginning in 1983, they do not apply at ages 70 and over. \3\ Public Law 104-121. Source: Office of the Actuary, Social Security Administration. The offset begins in the month during which concurrent entitlement begins under a Federal or State law. However, the offset will not be made if the State workers' compensation law provides for an offset against Social Security disability benefits. Offsets for receipt of pension from noncovered employment Government pension offset.--Social Security benefits payable to spouses of retired, disabled, or deceased workers are generally reduced to take account of any public pension the spouse receives as a result of work in a government job (Federal, State, or local) not covered by Social Security. The amount of the reduction is equal to two-thirds of the government pension. This provision is intended to place spouses who worked in jobs not covered by Social Security in the same position as other workers by imposing on them the equivalent of the Social Security ``dual entitlement'' rule, which imposes a dollar-for-dollar offset of spouses' benefits (discussed earlier). Two-thirds of the government pension represents a surrogate of the Social Security worker's benefit that would be subtracted from any Social Security spousal benefit. The offset does not apply to workers whose government job is covered by Social Security on the last day of the person's employment. TABLE 1-15.--RETIRED WORKERS WITH EARNINGS IN 1993 ------------------------------------------------------------------------ Total earnings Ages 62-64 Ages 65-69 ------------------------------------------------------------------------ $1-4,999.................................... 501,800 919,100 5,000-9,999................................. 344,000 568,600 10,000-14,999............................... 106,000 285,300 15,000-19,999............................... 55,800 126,000 20,000-24,999............................... 32,700 93,500 25,000-29,999............................... 20,000 68,500 30,000-34,999............................... 14,900 54,300 35,000-39,999............................... 9,300 37,300 40,000-44,999............................... 7,300 34,000 45,000-49,999............................... 4,600 22,300 50,000-54,999............................... 3,000 16,900 55,000-59,999............................... 2,700 19,900 60,000-64,999............................... 2,600 12,900 65,000-69,999............................... 1,000 9,600 70,000-74,999............................... 900 8,800 75,000-79,999............................... 1,000 5,800 80,000-84,999............................... 300 5,300 85,000-89,999............................... 400 6,500 90,000-94,999............................... 800 4,400 95,000-99,999............................... 300 10,100 100,000 +................................... 4,000 30,700 --------------------------- Total................................. 1,113,400 2,339,800 ------------------------------------------------------------------------ Source: Social Security Administration. Generally, Federal workers hired before 1984 are part of the Civil Service Retirement System (CSRS) and are not covered by Social Security. Federal workers hired after 1983 are covered by the Federal Employee's Retirement System Act of 1986 (FERS), which includes coverage by Social Security. Employees covered by the CSRS were given the opportunity in 1987, to join FERS and thereby obtain Social Security coverage. Windfall elimination provision.--Under the so-called ``windfall elimination'' provision of the Social Security amendments of 1983, a different benefit formula reduces the Social Security benefits of most workers who also have pensions from work that was not covered by Social Security (e.g., work under the Federal Civil Service Retirement System). The regular benefit formula (see earlier discussion) is weighted, in order to help workers who spend their work careers in low-paying jobs, by providing them with a benefit that replaces a higher proportion of their earnings than the benefit that is provided for workers with high earnings. However, the formula cannot differentiate between those who worked in low-paid jobs throughout their careers and other workers who appeared to have been low paid because they worked many years in jobs not covered by Social Security (these noncovered earnings are shown as zeros for Social Security benefit purposes). Thus, before the law was changed, workers who were employed for only a portion of their careers in jobs covered by Social Security also received the advantage of the ``weighted'' formula, because their few years of covered earnings were averaged over their entire working career to determine the average covered earnings on which their Social Security benefits were based. This was the case even if their noncovered earnings were high. The windfall benefit formula is intended to remove this advantage for these workers. It does so by substituting 40 percent for the 90 percent factor in the first bracket of the benefit formula (see discussion in earlier section on ``Benefit Formula''). (The second and third factors remain the same.) The resulting reduction in the worker's Social Security benefit is limited to one-half the amount of the noncovered pension. The new law was phased in over a 5-year period and affects those first eligible for both Social Security benefits and noncovered pensions after 1985. Workers who have 30 years or more of substantial Social Security coverage are fully exempt from this provision. For workers who have 21-29 years of coverage, the percentage in the first bracket in the formula increases by 5 percentage points for each year over 20, as shown in table 1-16. Suspension of Benefits to Prisoners In 1980, legislation was enacted barring payment of disability benefits to prisoners who committed felonies (Public Law 96-473). In 1983, the prohibition was broadened to include retirement and survivor benefits (Public Law 98-21); and in 1994, payment of benefits was barred to those in public institutions who committed serious crimes, but who were found incompetent to stand trial, or not guilty by reason of insanity (Public Law 103-387). Only benefits to the prisoner are barred; benefits to a prisoner's eligible spouse and/or children are payable. COST-OF-LIVING ADJUSTMENTS Monthly cash benefits were increased on an ad hoc basis 10 times before the first automatic cost-of-living adjustment (COLA) was implemented as a result of the Social Security amendments of 1972. Beginning in 1975, benefits have been automatically adjusted to keep pace with inflation. Since 1975, there have been increases annually except during calendar year 1983, when the adjustment was delayed 6 months (see table 1-1). TABLE 1-16.--WINDFALL BENEFIT FORMULA FACTORS ------------------------------------------------------------------------ First factor in Years of Social Security coverage formula (percent) ------------------------------------------------------------------------ 20 or fewer.................................................. 40 21........................................................... 45 22........................................................... 50 23........................................................... 55 24........................................................... 60 25........................................................... 65 26........................................................... 70 27........................................................... 75 28........................................................... 80 29........................................................... 85 30 or more................................................... 90 ------------------------------------------------------------------------ Source: Social Security Administration. Social Security beneficiaries receive a COLA in January of each year if there is a measurable annual increase in prices (0.1 percent). The Consumer Price Index for Wage Earners and Clerical Workers (CPI-W), updated monthly by the Bureau of Labor Statistics (BLS), is the measure used to compute the increase. The average CPI-W for the third calendar quarter of one year is compared to the average CPI-W for the third calendar quarter of the next year, and the resulting percentage increase represents the COLA that will become effective for the following December. The increase actually becomes effective for Social Security checks payable beginning in January, since Social Security checks always reflect the benefits due for the preceding month. A COLA of 2.6 percent beginning with checks payable in January 1996 was triggered by the rise in the CPI-W from the third quarter of 1994 to the third quarter of 1995. As in all years since 1975, this COLA, in turn, triggered identical percentage increases in Supplemental Security Income (SSI), veterans' pensions, and railroad retirement benefits, and caused other changes in the Social Security and Medicare Programs. Although COLAs under the Federal Civil Service Retirement System (CSRS) and the Federal Military Retirement Program are not triggered by the Social Security COLA, these programs use the same measuring period and formula for computing their COLAs. Determination of the COLA The 2.6 percent COLA for January 1996 became known on October 13, 1995, when the BLS announced the CPI-W figure for September 1995. With release of the September index, the two July-September sets of CPI-W figures needed to compute the COLA--one for 1994 and another for 1995--became available. Table 1-17 shows how the January 1996 COLA was computed under procedures set forth in the law. \3\ Table 1-18 shows the comparison between average wage increases and changes in the CPI from 1965 to 1995. --------------------------------------------------------------------------- \3\ Under section 215(i) of the Social Security Act. TABLE 1-17.--COMPUTATION OF THE SOCIAL SECURITY COLA, JANUARY 1996 ------------------------------------------------------------------------ CPI-W index points Month ------------------------- 1994 1995 ------------------------------------------------------------------------ July.......................................... 145.8 149.9 August........................................ 146.5 150.2 September..................................... 146.9 150.6 3-month average........................... 146.4 150.2 ------------------------------------------------------------------------ Note.--The reference base period for the CPI-W is 1982-84, i.e., the period when the index equalled 100. Source: Bureau of Labor Statistics. Increase in CPI index points from the third quarter of 1994 to the third quarter of 1995: 150.2 - 146.4 = 3.8 Percent increase in average CPI for the 2 quarters: 3.8 146.4 = 2.596% COLA = 2.6%. By law, the change must be rounded to the nearest tenth of a percent. TAXATION OF