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Social Security benefits (disability and retirement)

Social Security: the base layer of every income plan

Social Security is the federal social insurance program created by the Social Security Act and codified at 42 U.S.C. ch. 7. Its cash-benefit side is usually called OASDI — Old-Age, Survivors, and Disability Insurance. Workers and employers pay FICA taxes on covered wages, and the self-employed pay self-employment tax on covered net earnings. Those taxes buy coverage, not a savings account: benefits are computed from the worker's own record of covered earnings (Social Security Act, 42 U.S.C. ch. 7).

Agents matter here because Social Security is the floor beneath every disability income, life, and retirement recommendation. You cannot size a private policy until you know what the government program will and will not pay.

Step one: quarters of coverage

Credit is earned in quarters of coverage (QCs), sometimes called credits. A worker can earn no more than four QCs in a calendar year, so coverage builds over time rather than all at once.

Step two: insured status

QCs are then tested against three different standards:

  • Fully insured — generally one QC for each year after 1950 (or after the year the worker turned 21) up to the year of attaining retirement age, death, or disability. Forty QCs makes a worker permanently fully insured. Full insured status is the gateway to retirement benefits.
  • Currently insured — at least six QCs in the thirteen-quarter period ending with the quarter of death, disability, or entitlement. This narrower status supports certain survivor benefits.
  • Disability insured — a recent-work test layered on top of fully insured status, generally requiring twenty QCs in the forty quarters ending with the quarter of disability, with relaxed requirements for workers disabled at younger ages.
A three-level flow chart titled From Covered Work to OASDI Benefits. At the top, a box reads covered work: wages or self-employment income subject to FICA. An arrow leads down to a second box: quarters of coverage credited, maximum four per calendar year. From there, three arrows fan out to the three insured-status boxes in the middle row. The left box, fully insured, says one quarter of coverage for each year after 1950 or after age 21, up to 40 quarters, and 40 quarters makes a worker permanently fully insured. The center box, currently insured, says at least 6 quarters of coverage in the 13-quarter period ending with death, disability, or entitlement. The right box, disability insured, says the recent-work test generally requires 20 quarters of coverage in the 40 quarters ending with the quarter of disability, with fewer required for younger workers. The bottom row shows the three benefit families. Fully insured points down to the retirement box and also across to the survivor box. The retirement box says earliest age 62 with a permanently reduced amount, unreduced at full retirement age of 65 rising to 67, and delayed retirement credits if you wait. Currently insured points to the survivor box, which lists surviving spouse, divorced spouse, dependent children, and dependent parents, plus a lump-sum death payment, with a family maximum. Disability insured points to the disability box, which says the worker must be unable to do any substantial gainful activity because of an impairment that is fatal or expected to last twelve months or more, that a five full calendar month waiting period applies, and that Medicare begins after 24 months. A final arrow runs along the bottom from the disability box back to the retirement box, labeled: disability benefits convert to retirement benefits at full retirement age.
Covered work builds quarters of coverage, which are tested for insured status and then determine which OASDI benefits are payable.

Retirement benefits

A fully insured worker may claim reduced old-age benefits as early as age 62; the reduction is permanent. The unreduced amount is payable at full retirement age, which the statute raised from 65 toward 67 depending on year of birth. Waiting beyond full retirement age earns delayed retirement credits that increase the monthly amount up to age 70. The benefit itself is derived from the worker's indexed career earnings, producing a primary insurance amount — the figure from which spouse's, child's, and survivor amounts are also calculated. Benefits are weighted so that lower earners are replaced at a higher percentage of pre-retirement earnings.

Disability benefits

Social Security's disability definition is strict and own-occupation coverage it is not. The statute requires inability to engage in any substantial gainful activity because of a medically determinable physical or mental impairment that is expected to result in death or that has lasted, or can be expected to last, for a continuous period of not less than 12 months.

Benefits begin only after a five full calendar month waiting period, so the first payable month is the sixth month of disability.

Entitlement to disability benefits also opens the door to Medicare after a further statutory waiting period, and disability benefits automatically convert to retirement benefits when the worker reaches full retirement age — the individual does not receive both.

Family and survivor benefits

The same earnings record can support dependents: a spouse, a divorced spouse, dependent children, and in some cases dependent parents, plus a lump-sum death payment. Family benefits are subject to a maximum family benefit, and earnings before full retirement age can reduce benefits under the retirement earnings test.

Sample questions

Marisol works in covered employment for all twelve months of the year and earns far more than the amount needed to be credited for work. What is the maximum number of quarters of coverage she can be credited with for that single calendar year?

  • One for each month of covered work, up to twelve
  • Two
  • Six, because credits accrue on a thirteen-quarter cycle
  • Four
Preview

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