►PURPOSE

The Old Age and Survivors Disability Health Insurance (OASDHI) system is COMMONLY referred
to as Social Security. Social Security was established during the Great Depression to assist the masses
of people who could not afford to sustain their way of life because of unemployment, disability, illness,
old age, or death.

WHO IS COVERED

Social Security extends coverage to virtually every American who is employed or self-employed, with
a few exceptions. Those not covered include:

• Most federal employees hired before 1984 who are covered by Civil Service Retirement or another
  similar plan

• Approximately 25% of state and local government employees who are covered by a state pension
  program and elect not to participate in the Social Security Program

• Railroad workers covered under a separate federal program called the Railroad Retirement System

►HOW BENEFITS ARE DETERMINED

A person must be insured under the Social Security program in order for survivors, disability, or
retirement benefits to pay. Social Security benefits are based on how long a covered worker has worked
throughout his life.

Insured Status

Social Security establishes benefit eligibility based on an “insured” status. There are two types of insured
statuses that qualify individuals for Social Security benefits: fully insured and currently insured. Most
Social Security benefits are paid to fully insured individuals.

Fully Insured and Currently Insured

To obtain fully insured status, a covered worker must accrue a total of 40 quarters of credit, which is
about 10 years of work. To be considered currently insured, and thus eligible for limited survivor
benefits, a worker must have earned 6 credits during the last 13-quarter period.

Social Security Payroll Taxes

Funding for Social Security is collected from FICA payroll taxes. Social Security payroll taxes are collected
from employers, employees, and self-employed individuals. FICA tax is applied to an employee’s income
up to a certain income amount. This amount is called the taxable wage base. There is a maximum
amount of earnings that can be subject to Social Security tax each year. This amount is indexed each year
to the national average wage index. This maximum applies to employers, employees, and self-employed
individuals. Medicare Part A taxes are not subject to a maximum taxable wage cap.

Taxation of Social Security Benefits

Social Security benefits are subject to federal income tax if the beneficiary files an individual tax return
and his annual income is greater than $25,000. Joint filers will pay federal income tax on their Social
Security benefits if their income is greater than $32,000.

Calculating Benefits

The amount of Social Security benefits a person receives is based on the individual’s average monthly
wage during his working years. The primary insurance amount (PIA) determines the full amount of
retirement benefits for an eligible person at age 65. If a worker retires early, for example at age 62, his
retirement benefits will be 80% of his PIA and will remain lower for the covered worker’s life.

►TYPES OF OASDI BENEFITS

Survivor's Benefits

Social Security Survivors benefits or death benefits: pay a lump-sum death benefit or monthly income
to survivors of deceased covered workers.

A surviving spouse without dependent children is eligible for Social Security survivor benefits as early as age 60.
Survivor benefits are also available to:

• A spouse of any age who is caring for children under age 16
• Children under age 18
• Children under age 19 who are full time students
• Children at any age if disabled before age 22 and remain disabled

A Social Security benefit of 75% of the Primary Insurance Amount (PIA) is given to an underage child of a deceased worker.

Disability Benefits

Social Security Disability Benefits: are only available to covered workers who are fully insured, as defined by Social Security, at the time of disability. Disability, as defined for Social Security purposes, describes an employee who is unable to engage in any occupation. A person may first become eligible for disability benefits under Social Security after having been disabled for 5 months.

• Social Security disability benefits are only available prior to the age of 65. Social Security does
  not pay partial disability or short-term disability benefits

• The disability must be total and expected to last 12 months or end in death

• Benefits include monthly payments to the disabled worker, spousal benefits, and child’s benefits

Definition of Disability

Disability, as defined for Social Security purposes, describes an employee who is unable to engage in
any occupation.

• The insured has a disability that is expected to result in early death or is expected to last for a
  continuous period of 12 months

Retirement Benefits

Social Security retirement benefits are only available to covered workers who are fully insured upon
retirement. Benefits are paid monthly. If a covered worker retires at the normal retirement age, he will
receive 100% of the PIA. However, if a covered worker retires early at the age of 62, the maximum Social
Security benefit is 80% of the PIA. This reduction remains all through retirement. Retirement benefits
pay covered retired workers, their spouses, and other eligible dependents a monthly retirement income.

Black-Out Period

This refers to the time interval between the date benefits end under Social Security and the date these benefits
resume. The “black-out period” begins when Social Security survivorship benefits cease. This is when the
youngest child turns 16 years old, or if no children- immediately. The “black-out period” ends when the
surviving spouse turns at least 60 years old.