By Bruce D. Schobel, Corporate Vice President and Actuary, New York Life Insurance Company
Starting in 2000, the Social Security Administration (SSA) began mailing personalized earnings and benefit estimate statements annually to all workers age 25 or older who have worked in employment or self-employment covered by the Social Security system. These statements normally arrive about 3 months before a worker's birthday. Most people focus on the benefit estimate, because they are naturally interested in how much Social Security expects to pay them at retirement or if they become disabled or, if they die, how much their survivors can expect to receive. The statement also includes a record of the worker's lifetime earnings reported to Social Security, and that part of the statement is too often overlooked.
Every worker covered by Social Security pays Social Security taxes, currently at the rate of 6.20 percent up to a maximum taxable amount of $106,800 for 2010. And the combined rates remain the same in 2010 as in 2009: 7.65 percent for employees and 15.30 percent for self-employed individuals. The 7.65 percent rate is the combined Social Security and Medicare rate. The Social Security portion is 6.20 percent on wages up to the maximum taxable cap ($106,800), which will require both employer and employee to pay a maximum Social Security tax of $6,621.60 each.1
In return for paying these substantial taxes, workers are supposed to get credit for the appropriate amount of Social Security-covered earnings. Those earnings are used by SSA to compute any retirement, disability or survivors benefits to which workers and their families may become entitled. Most earnings reported to SSA are properly credited. Unfortunately, some are not, for a variety of reasons.
Incorrect reporting of the amount of earnings is relatively uncommon. Much more common is the failure to post any earnings for a year. Most such omissions are the fault of workers or employers, who must report all earnings to SSA on Form W-2. If an employer uses the incorrect Social Security number for an employee, then SSA cannot determine who should get credit for the earnings. Many workers have similar names. If a worker changes his or — much more commonly — her name without reporting the change to SSA, then the name and number will not match SSA's records, and the earnings will not be posted. Sometimes the government makes mistakes, too.
Missing earnings can have a significant effect on benefits. For example, consider a worker who retires at age 65 in 2000 after having earned the maximum taxable amount in each of the 35 years 1965-99. This worker should receive $1,431 per month (before deduction of the monthly premium for Medicare). If, however, the worker's earnings for just one year, say 1990, were missing, the monthly benefit would drop to $1,409, a reduction of $22 per month, or $264 per year — for life! Considering 65-year-old retirees can expect to receive benefits for about 16 years if a man and about 19 years if a woman (based on average life expectancies), the present value of the lost benefits would be at least $4,000.
Losses like that can be avoided by carefully checking the earnings record that SSA provides in the personalized earnings and benefit estimate statement. If the hypothetical worker described above had checked his or her earnings record, the absence of earnings in 1990 would have been apparent and could have been corrected. In the past, some kinds of errors had to be corrected within about 3 years. The law was changed in 1989, however, to permit corrections to be made any time, even after benefits have begun. Complete omissions of earnings for a year can always be corrected, if the worker provides evidence of the correct figure. Employers usually can help.
This material is for information purposes only, Neither New York Life nor its agents provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.
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1 Source: http://www.ssa.gov/
Last Updated Date 9/26/2010
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