The Social Security Act of 1935 created a social insurance program designed to provide retired workers age 65 or older a continuing income after retirement.
From 1937 until 1940, Social Security paid benefits in the form of a single, lump-sum payment. This was to provide some “payback” to those people who contributed to the program but would not participate long enough to be vested for monthly benefits. Monthly benefits were to begin in 1942, with the period of 1937 to 1942 used to build up the “Trust Fund” and to provide a minimum period for participation in order to qualify for monthly benefits. The first recipient of a lump-sum payment retired one day after the program began and received 17 cents. The average lump-sum payment during this period was $58.06.
The 1939 Amendments
The 1939 Amendments made a fundamental change in the Social Security program that added two new categories of benefits: payments to the spouse and minor children of a retired worker (dependent benefits) and survivor benefits paid to the family in the event of premature death of covered workers. This change transformed Social Security from a retirement program for workers into a family-based economic security program.
The 1939 Amendments also increased benefit amounts, which were fixed (no Cost of Living Allowances), and accelerated the start of monthly benefits payments to 1940. The first monthly retirement check was issued January 31, 1940 in the amount of $22.54. Ida May Fuller retired in November 1939 at age 65 and lived to be 100 years old. The accumulated taxes on her salary for the 3 years she participated were $24.75. During her lifetime she collected $22,888.92 in Social Security benefits. (Do the math. Now you can see why Social Security tax rates and wages subject to Social Security tax have increased dramatically—to replenish the pot.)
The 1950 Amendments and COLA
From 1940 until 1950, virtually no changes were made in the program. Because the program was in its infancy and financed by low levels of payroll tax, the retirement benefits were very low. Old-age welfare benefits were higher than retirement benefits received under Social Security.
In 1950, amendments increased benefits for existing beneficiaries for the first time and increased the value of the program to future beneficiaries by providing Cost of Living Allowances (COLA). Ida May Fuller’s retirement benefit had been $22.54 per month for 10 years. With this recomputation and change, her October 1950 check was $41.30. After 1950, benefits were only increased when Congress enacted special legislation.
In 1972, the law was changed to provide automatic annual COLA based on the annual increase in consumer prices beginning in 1975.
Disability
In 1954, a disability insurance program was added. Initially the program only kept your benefit periods alive while you were disabled so that you could receive higher benefits at retirement. In 1956, the act was amended to provide benefits to disabled workers aged 50-64 and disabled adult children. In 1960 the law was amended to permit payment of benefits to disabled workers of any age and to their dependents.
Medicare, SSI, and the 70s
Under the amendments of 1961, the age at which men are first eligible for reduced retirement benefits was lowered to 62 (women were given this option in 1956). In July 1965, the Medicare bill was signed which extended health coverage to almost all Americans aged 65 or older. Nearly 2 million people enrolled in the first 3 years.
In the 1970s, Supplemental Security Income (SSI) was introduced. In the original act, programs were introduced for needy-aged and blind individuals. Needy-disabled individuals were added in the 50s. However, these programs were administered by the states and only partially funded with federal dollars. In 1972, Congress federalized these categories and assigned it to the Social Security Administration.
The 1972 amendments also provided for certain other increased benefits: a minimum retirement benefit, an extension of Medicare to those receiving disability benefits for at least two years, a liberalization of the Retirement Test, and an increase in the benefits for those working past age 65 provided by the Delayed Retirement Credit.
The 1977 amendments raised the wage base, reduced benefits slightly and changed the method for calculating COLA. The last was an important change as the prior method would have had retirees collecting more from Social Security than they had received in gross salaries while working.
Taxing Your Benefits
The 1983 bill made numerous changes to the Social Security and Medicare programs including adding Federal employees to Social Security and increasing the retirement age to 65. It also included the taxation of Social Security benefits.
As we know, the legislature and the IRS cannot make this easy. In 1983, there was one standard whereby up to 50% of your Social Security benefits could be taxable for federal income tax purposes (most states do not tax Social Security income). Since 1994, up to 50% of benefits were taxable at one income level and up to 85% were taxable for higher income levels. Now keep in mind that Social Security benefits are, in theory, those taxes withheld from your pay and matched by your employer. This is, in effect, a tax on a tax.
How much of your Social Security income is taxed depends on your provisional income. Provisional income is the taxpayer’s modified adjusted gross income plus one-half of your Social Security benefits. Modified adjusted gross income is your adjusted gross income plus all tax-exempt income. Fifty percent of the excess provisional income over a base amount ($32,000 for married filing jointly, $25,000 for single) is taxable, up to 50% of your benefit.
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Adjusted Gross Income
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$24,000
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Plus: All Tax Exempt Income
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$6,000
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Equals: Modified Adjusted Gross Income
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$30,000
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Plus: 1/2 of Social Security Benefits
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$3,600
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Equals: “Provisional Income”
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$33,600
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Less: Base Amount
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$32,000
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Excess Above Base
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$1,600
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1/2 of Excess Above Base
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$800
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1/2 Social Security Benefit
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$3,600
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Lesser of the Two (this amount included in taxable income)
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$800
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For those taxpayers whose provisional income is in excess of $44,000 (married filing jointly) or $34,000 (single), up to 85% of their benefit can be taxable. The worksheet and explanation to calculate the taxable amount is beyond the scope of this article. For tax projection purposes, if your provisional income is in excess of $44,000, assume that 85% of your Social Security benefits will be taxable—you probably will not be off by much.
A Benefits Primer
- Generally, you must have at least 40 quarters of coverage to receive retirement benefits.
- Full retirement age is 66 for those reaching age 62 by 2013. It is increasing by 2-month intervals until the retirement age to collect full benefits is age 67 (for workers reaching age 62 after 2022).
- Reduced benefits are available at age 62 (for widow’s age 60). In the past, you could receive 80% of your full benefits at age 62. Now it is 75%. This scale will change as the retirement age increases.
- Spouses can collect on their own account or 50% of your account, whichever is higher, at full retirement age. A spouse could collect 35% at age 62. This amount will change as the retirement age moves up.
- A divorced spouse may collect on their prior spouse’s benefit base if they were married to the worker for at least 10 years.
- Those under full retirement age can lose retirement benefits if they earn more than $15,120 while receiving Social Security benefits.
- Disability benefits are available to those under age 65 but are very difficult to receive.
- If you are receiving retirement benefits and have a child at home under age 18, the child may receive benefits.
- A surviving spouse and a child of a deceased, covered worker is entitled to certain benefits.
If you would like further information regarding this topic or any other tax related issue, contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
