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Social Security Explained, 2009 Edition 
Provides a comprehensive and detailed explanation for the federal old-age, survivor's and disability insurance segments of the Social Security program.
For the first time since 1975, when Social Security benefits became indexed to increases in the Consumer Price Index, there will be no cost-of-living increase in Social Security benefits for the coming year. The lack of increase is the result of a 2.1% decline in the Consumer Price Index (CPI) over the past year.
The Social Security Act (Act) provides for a cost-of-living adjustment, or COLA, based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of one year to the third quarter of the next year, but only if the adjustment is a positive one (Act § 215(i)). The decline in the index from the third quarter of 2008 to the third quarter of 2009 means that benefits will not rise in 2010, and, according to Social Security actuaries, benefits also are not likely to rise in 2011. In order for an increase to occur, the index must first make up for any decline in the CPI-W this past year and then rise above its level as of the third quarter of 2008. This scenario is not expected to happen until some time in 2011.
The average Social Security retirement benefit as of the end of September 2009 was $1,161. Any increase in the average benefit over the next year will come about only because average indexed lifetime earnings of those individuals first becoming eligible for retirement benefits may be higher. The current average benefit is only slightly higher than the average benefit of $1,153 for December 2008 that was payable in January 2009 after application of last year’s 5.8% cost-of-living adjustment.
There also will be no increase in the Part B Medicare premium for most beneficiaries this year due to a “hold harmless” provision in the Act (Act § 1839(f), 42 USC §1395r) that blocks premium increases when benefits do not rise. The amount of earnings subject to taxation under FICA and SECA, the “wage base,” also will remain at the current level of $106,800 for 2010. Under Act § 230(a), the wage base can be increased only if there has been a benefit increase due to a cost-of-living adjustment. Absent that prohibition, the wage base would have risen to $109,200 for 2010 under the statutory formula.
The benefit and wage base increases for 2010 were announced October 15 by the Social Security Administration in a press release.
The amount of FICA (Federal Insurance Contribution Act) tax deducted in 2010 from paychecks next year will be no higher than the amount deducted on identical earnings in 2009. Although the tax rate for the Old-Age, Survivors and Disability Insurance (OASDI) portion of the tax under the FICA has held steady at 6.2% since 1990, the amount of wages subject to tax ordinarily increases each year based on increases in the national average wage.
Although there is no wage base increase for 2010, and there probably will not be one next year either, the next time there is a benefit increase—2012—will also be a year in which there will be a huge increase in the wage base—to $114,900, according to the prediction in the 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds issued in May of this year. This large increase will occur because the wage base formula (Act § 230(b)) for that year will take into account the cumulative increase in national average wages during the period wage base increases were barred due to the lack of a benefit increase.
The $106,800 earnings base for 2010 applies only to the 6.2% OASDI portion of the Social Security tax. There is no limit on the amount of earnings subject to the 1.45% Medicare (hospital insurance) portion of the tax.
The 0.0% benefit COLA and the $106,800 wage base for 2010 exactly match the published estimates in the 2009 Trust Funds report. The 2010 wage base, the same as in 2009, reflects national average wages for 2007, the variable upon which the 2009 wage base formula is based.
The 2008 national average wage index of $41,334.97 is 2.3% higher than the 2007 national average wage index and is the second lowest increase since 1993. It is also significantly lower than the average increase of 4.01% over the past 24 years. Moreover, the 2.3% increase is 27% less than the increase predicted by the Social Security trustees in their May 2009 report.
Based on the 2008 national average wage index, the formula set forth at Act §230(b) indicates that wages and self-employment earnings up to $109,200 would be subject to taxation under FICA and SECA in 2010 if such an increase was allowed this year.
The employee/employer Social Security tax rate remains at 7.65% for 2010, including 6.2% for the OASDI portion and 1.45% for the hospital insurance portion. For the self-employed, the rate continues to be 15.3%. Note that self-employed persons calculate their net earnings as gross earnings reduced by 7.65%, and they deduct half of their Social Security taxes from their net earnings for federal income tax purposes.
For 2010 the amount of wages a domestic worker can earn without being subject to FICA taxes remains at the 2009 level of $1,700. This amount has nothing to do with the absence of a COLA for 2010. Rather, it is due to the fact that increases in the threshold are based on a statutory formula that takes into account annual increases in national average wages. Although national average wages have gone up, they have not risen sufficiently to trigger a threshold increase under the statutory formula. An employer can therefore pay a domestic worker, such as a maid or nanny, up to $1,700 in 2010 without having to wrestle with federal withholding on wages.
Similarly, there is no increase in the no-tax threshold for election workers. The amount of wages they can earn before being subject to FICA remains at $1,500 for 2010.
The 2.1% decline in the CPI-W from the third quarter of 2008 to the third quarter of 2009 follows last years 5.8% increase, the largest since 1981. The decline was due, in general, to a decline in energy costs, and, in particular, to a drop in the price of gasoline, which decreased in price by 29.9% over the past 12 months. Steve Reed, an economist with the Bureau of Labor Statistics, the agency charged with determining the CPI, told Wolters Kluwer that if gasoline were removed from the CPI determination, the CPI would have increased by approximately 0.6%. Other significant declines were in the prices of natural gas and fuel oil.
Reductions in the price of food, used cars and trucks, lodging and airfares also contributed to the decline in the cost of living.
The CPI-W reflects cost increases for wage earners and thus excludes the impact of cost increases on higher income earning self-employed professionals and business owners. For wage earners, the impact of lower energy costs is slightly lower than it is for all urban consumers.
For Social Security beneficiaries, the average monthly benefit (prior to deduction for the Part B Medicare premium) for all retired workers is currently $1,161, only slightly higher than the average benefit of $1,153 paid after application of last years 5.8% cost-of-living adjustment.
The maximum Supplemental Security Income (SSI) monthly benefit for an individual will remain at $674 and the maximum SSI payment to a couple will remain at $1,011.
Workers who attain age 65 in 2010 will have to wait until 2011 to retire if they wish to receive their full retirement benefit. A gradual rise in the full retirement age began in 2000 as a result of the 1983 amendments to the Social Security Act, which increased the full retirement age from 65 to 67. The only individuals attaining full retirement age in 2010 will be individuals attaining age 66, i.e., individuals born from January 2, 1944, through January 1, 1945. For such individuals, the maximum possible monthly benefit is $2,346. The maximum monthly benefit payable to someone born in 1945 who still wishes to retire upon reaching age 65 in 2010 is $2,191. This is an increase of $19 per month over what was payable to a worker retiring at age 65 in 2009.
If someone born in 1945 waits until they reach their full retirement age of 66 in 2011, their maximum benefit will be much higher, and its calculation would take into account 2010 earnings up to the maximum wage base of $106,800 plus the 2011 COLA, which will be announced in October 2010. Full retirement age will remain at 66 for the next 11 years for individuals born from January 2, 1943, through January 1, 1955.
Workers may retire as early as age 62, but they will receive a reduced benefit if they do. In 2010, workers whose birth date is January 2, 1948 through January 1, 1949, inclusive, will not be entitled to a full retirement benefit unless they delay retirement until age 66. Their retirement benefit will be higher at that time, but workers with average lifetime earnings will have to live until their mid to late seventies to recover the benefits they lost by waiting until full retirement age.
The full retirement age of 66 for workers reaching age 62 in 2010 is also based on the 1983 amendments. The practical effect of this change is to slightly decrease the amount of early retirement benefits payable to individuals who reach age 62 in 2010 by increasing the reduction amount in the benefit formulas by 5/12 of 1.0% of an individual’s primary insurance amount (PIA) for each additional month of retirement beyond 36 months. This process is explained more fully in the CCH Unemployment Insurance Reporter with Social Security at ¶ 12,305 in the “Social Security: Benefits Explained” division. PIAs are explained at ¶ 12,210 and ¶ 12,211 in the same division.
The average payment for certain beneficiary categories has increased slightly since December 2008, based on the natural increase in the indexed cumulative earnings (upon which benefits are based) for the most recently retired workers. For a widowed mother with two children, the average monthly benefit at the end of September 2009 was $2,333 (up from $2,326 in December 2008). For an aged widow or widower living alone, the average monthly benefit at the end of September 2009 was $1,121 (up from $1,112). The average monthly benefit for all disabled workers has actually declined however. For September 2009 it was $1,062, one dollar less than the average for December 2008.
The 2.3% increase in the national average wage index used in the wage indexing formula will change the “bend point” parameters used in the PIA calculations from which the actual monthly benefit amount is ultimately determined. The bend points used in the computations of the PIA for workers who first become eligible to receive a benefit in 2010, or who die in 2010 before becoming eligible, will be $761 and $4,586, respectively.
The 2010 eligibility year PIA formula, which is based on a worker’s average indexed monthly earnings (AIME) throughout his or her career, thus will be 90% of the first $761 of AIME, plus 32% of AIME over $761 through $4,586, plus 15% of any AIME in excess of $4,586. The maximum PIA obtainable under this formula for a worker who reaches age 62 in 2010 is $2,413.30, which translates to a maximum possible monthly benefit of $1,820 for most workers at age 62, reflecting an approximate actuarial reduction of 25% for early retirement at age 62.
The maximum family benefit in cases involving workers who first attain age 62, become disabled or die in 2010 will be computed as 150% of the first $972 of the worker’s PIA, plus 272% of the worker’s PIA over $972 through $1,403, plus 134% of the worker’s PIA over $1,403 through $1,830, plus 175% of the PIA in excess of $1,830.
The amount of monthly earnings in 2010 that will give rise to a presumption that a disability beneficiary is no longer disabled, that is, the amount that is deemed sufficient to demonstrate an ability to engage in “substantial gainful activity” is $1,000, an increase of $20 from 2009. A higher threshold of $1,640 will apply to blind beneficiaries in 2010, the same as in 2009.
Disability beneficiaries may work for as many as nine months during any 60-month period without affecting their right to receive benefits. This is known as “trial work.” In 2010, a disabled beneficiary who works will not be treated as having engaged in trial work for any month in which his or her earnings are no more than $720, an increase of $20 over the 2009 limit.
There is no trial work period for SSI disability beneficiaries. However, if an SSI beneficiary is working, has only earnings, and does not pay expenses in order to work, he or she may earn up to $1,433 per month in 2010 before SSI federal cash benefits stop. The limit was $1,435 in 2009. This amount is based on an exclusion of the first $85 of monthly earned income (assuming the person has no other income) plus a monthly deduction of $1 for every $2 earned thereafter. SSI beneficiaries in states that provide a supplement to the federal SSI benefit can earn even more before cash payments stop. However, if an individual has earnings of $1,000 or more in 2010, then the individual would be considered to be engaging in “substantial gainful activity” and would probably not be eligible for SSI disability benefits unless he or she is blind.
The amounts that Social Security beneficiaries can earn without having their retirement benefits reduced will not increase for 2010 because, under Act §203(f)(8)(A), the statutory formula under which the thresholds are determined is not applicable for years in which there is no cost-of-living increase.
Although the Senior Citizens’ Freedom to Work Act of 2000 eliminated the annual earnings test as of January 2000 for workers between full retirement age (age 66 in 2010 for workers who attained age 65 in 2009) and age 69, workers under the full retirement age of 66 who are receiving benefits remain subject to the test and can earn up to $14,160 in 2010, or $1,180 per month, without having their benefits reduced. One dollar in benefits is withheld for every $2 in earnings above the limit.
A modified test applies to a worker in the year that he or she reaches full retirement age. Thus, workers who reach age 66 in 2010 may earn up to $37,680 in the months preceding the attainment of full retirement age without having their benefits reduced. As with the lower threshold, this amount is identical to the 2009 limit. One dollar in benefits is withheld for every $3 in earnings above the limit.
Once an individual reaches full retirement age, benefits are no longer subject to any retirement test. Beneficiaries age 70 and older have not been subject to benefit reductions based on earnings since 1983.
If an increase in the thresholds had not been barred this year because there was no benefit increase, the lower and upper thresholds would have been $14,400 and $38,400, respectively, based on the statutory formula set forth in Act §203(f)(8)(B). As with the determination of the wage base, in 2012, the next year in which there will likely be a benefit increase, there also will be a huge increase in the annual earnings thresholds—to $15,240 and $40,560, respectively, according to the predictions in the 2009 Trust Funds report.
Although the Department of Health and Human Services has not yet announced the standard Medicare Part B premium for 2010, if the premium increases, about 75% of all Part B enrollees, including 93% of all Social Security beneficiaries, would be held harmless, or not responsible, for the increase in Part B premiums by Act §1839(a) (42 USC § 1395r). Individuals who would not be held harmless are lower income beneficiaries whose premiums are paid by Medicare, higher income beneficiaries who pay income-related Part B premiums, and new enrollees.
A relatively small number of Medicare Part B enrollees with higher incomes, approximately 5%, pay a higher premium based on their income. The actual amount depends upon the extent to which an individual beneficiary’s income exceeds $85,000 (or a married couple’s income exceeds $170,000). The maximum premium could be as much as $308.30 if rates remain the same as in 2009. However, because every $1 in Part B premiums collected is matched with $3 in federal general revenues, the hold harmless provision could reduce Supplementary Medicare Insurance (SMI) Trust Fund income dramatically. Under the Social Security Act, Part B premiums could be adjusted so that the aggregate amount of collected premiums equals 25% of the Part B program costs.
According to a Centers for Medicare and Medicaid Services (CMS) actuary, as reported by the Congressional Research Service (CRS), “under current law, the only way to offset the lost revenue would be to increase the Part B premiums for these years substantially above normal requirements.” Thus, because three quarters of Part B enrollees would be held harmless, the entire increase in beneficiary costs would be borne by the remaining one-quarter. According to the CRS report, premiums for beneficiaries not held harmless would increase nearly four times as much as they would have if there was no hold harmless provision. (The CRS report, How Would Medicare Part B Premiums Be Affected if There Is No Social Security COLA, October 1, 2009, will appear in an upcoming Report.)
Currently, there is a bill pending in Congress, H.R. 3631, that would freeze the 2010 monthly premium at the 2009 premium level. This legislation passed the House on September 24, 2009, by a vote of 406 to 18.
The hold harmless provision relates only to the Part B premium. Accordingly, the CMS predicts that the average Medicare Part D (prescription drug) premium will be $30 in 2010, an increase of $2 over the 2009 average premium of $28. The agency has not yet disclosed what the Part A deductible and skilled nursing facility daily coinsurance payment will be for 2010.
The Social Security Administration’s official publication of the formula adjustments, cost-of-living increases, and tax and wage bases that will affect Social Security benefit computations in 2010 and its explanations of how the adjustments are calculated will appear in the Federal Register by the end of October.
©2009, CCH. All Rights Reserved.
