Last updated: 10/12/2018
Peter W.
Martin
Cornell Law School
From the outset, Social Security (initially Old Age Insurance or OAI but soon Old Age and Survivors Insurance, OASI, and eventually Old Age, Survivors, and Disability Insurance, OASDI) has been constructed within a "social insurance" framework. The program is designed to insure individuals and their families against the loss of earned income associated with retirement, disability, and, in the case of surviving family members, the earner's death. Both eligibility for benefits and the monthly payments for those who are eligible depend on how much the insured working person involved earned in types of work covered by the Social Security system, over a period of years.
By the time most people become eligible for Social Security benefits, whether due to their own retirement or disability or the retirement, disability, or death of a family member, the basic facts on which their coverage and benefit amount calculations rest have been established for some time. That is because the benefit provisions look back across a working lifetime using the same definitions as were applied, year by year throughout that period, in the imposition of the Social Security tax. Reporting of the income for Social Security tax purposes, its characterization for tax purposes, and payment of the tax are not legal preconditions to nor determinative of treatment of a benefit claim. On the other hand, the records of covered employment and self-employment income maintained by the Social Security Administration are based, year by year, on the information drawn from Social Security tax records of the Internal Revenue Service. Those records of income in covered work are given strong, and in some cases conclusively, presumptive effect after a short period of years. As a consequence, most, although not all, of the attention to these questions of covered employment and self-employment concern the tax provisions which parallel the benefit sections of the Social Security Act.
The types of work covered by Social Security have steadily been expanded since the program was first established in 1935. Today, most work performed in the United States, as well as most work performed abroad by U.S. nationals, is covered. Both work done in one's own business ("self-employment") and work done as an employee in someone else's business ("employment") count. On the other hand, income that comes to an individual without work, such as interest income, dividends, and similar forms of return on investment, does not count. The same holds true for gifts or lottery winnings.
Social Security's insurance character is reflected in terms that are integral to benefit eligibility and amount. To be eligible for Social Security benefits either the benefit claimant or a relevant family member must be "insured." Insured status is acquired by work in covered employment over a period of years. Different benefit categories require different types of insured status. All of them, however, rest on "quarters of coverage," as in calendar quarters. "Quarters of coverage" (which the Social Security Administration has begun calling "credits") are accrued on the basis of minimum levels of employment over time. Through this insurance construct, all Social Security benefits depend on their being a minimally sufficient period of past covered work, subject to the Social Security tax and recorded under the "insured" individual’s Social Security number. Not only does benefit eligibility depend on a sufficient level of past, covered earnings, but benefit amounts are set in relation to them. All Social Security benefits are expressed initially as a percentage of the insured individual's "primary insurance amount" or PIA. The PIA is calculated on the basis of the worker’s level of covered earnings over a period of years. Higher levels of covered earnings produce higher PIAs; lower levels yield lower ones.
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Conceptually and historically a quarter of coverage is acquired in a calendar quarter (January through March, say, or July, August, and September) during which covered earnings exceed a specified amount. However, since the late 1970s the number of quarters credited for a year (not exceeding four, of course) have been determined on the basis of annual earnings, without regard to the months in which that total was earned. The amount that will give rise to a full four credits is set sufficiently low that modest earnings over a number of years can give rise to insured status. Furthermore, since the earnings need not be spread over the year, earnings from seasonal work (over the summer months, for example) can produce a full four quarters of coverage. For 2018, $1,320 in covered earnings is sufficient to earn one quarter of coverage or credit; $5,280 or more earns four. Like numerous other program parameters the "quarter of coverage" figure is subject to annual adjustment pursuant to a statutory formula. 42 U.S.C. § 413(d)(2).
"Quarters of coverage" or "QCs" or simply "credits" are central to determinations whether the claimant or key family member has the insured status required for eligibility. Depending on the type of benefit that may be "fully insured" status, "currently insured" status, or insured status for disability benefits. (In addition, the Agency sometimes uses the phrase "permanently insured" to identify workers who have acquired sufficient quarters of coverage that they will retain "fully insured" status whether or not they continue to work.)
Old Age Insurance (retirement benefits) and most survivors benefits require "fully insured" status. During the program's early years the requirements for "fully insured" status were increased for successive cohorts, but for workers reaching 62 in 1999 and thereafter the figure has held steady at forty credits (forty quarters of coverage). That total can be achieved in ten years of covered work. In some cases, however, the full forty are not required. Workers who die before age sixty-two can end up qualifying as "fully insured," thereby generating benefits for surviving family members, with fewer quarters of coverage. The exact number required depends on their age at time of death. The formula is satisfied by one quarter for each year after the year of the worker's twenty-first birthday and before the year of death, subject to a minimum of six. Consequently, for someone dying at age thirty, eight credits (obtainable in two years of covered work) will suffice. 42 U.S.C. § 414(a).
"Currently insured" status is based on recent work in covered employment and not the individual's lifetime total. Six quarters of coverage out of the last thirteen, at the point eligibility is being determined, will meet the test. In short, enough work spread over the past three years will give rise to "currently insured" status. 42 U.S.C. § 414(b). A limited set of benefits are available to survivors of a worker who was, at time of death, currently but not fully insured. These include survivors benefits for children, benefits for a surviving spouse caring for children, and lump sum death benefits. 42 U.S.C. §§ 402(d)(1), 402(g)(1), 402(i).
Disability benefit claimants and those claiming family benefits through them must satisfy a distinctive two-part insured status test. The first part, derived from the "fully insured" status test, can be satisfied by covered work performed at any time. It applies to all disability insurance claimants. It is met by anyone who would have satisfied the test for "fully insured" status had they turned 62 at the point their disability began. 42 U.S.C. § 423(c)(1)(A).
The second component can only be satisfied by recent work. It applies to all disability insurance claimants, except those who are disabled by virtue of blindness. This part of the insured status test has two different versions. Which one applies depends on the age at which the individual became disabled. One version applies to individuals who become disabled in or after the quarter in which they become 31. It requires 20 quarters of coverage during the 40-quarter period immediately prior to disability, not counting quarters falling even partially within a recognized period of disability. An alternative sliding-scale version applies to individuals who become disabled at a younger age. It requires only that there be quarters of coverage equal to 1/2 the quarters falling after the claimant became 21 and before the claimant became disabled, subject to a minimum set at 6 quarters of coverage out of the last 12. 42 U.S.C. § 423(c)(1)(B).
An individual's "primary insurance amount" (PIA) is calculated from the individual's past covered (and taxed) earnings. Usually not all those earnings are counted. Furthermore, most are not counted at their original dollar amount.
The insured worker's PIA is the starting point for nearly all benefit calculations. It is, first of all, the monthly benefit to which a retired worker is entitled if benefits are begun at "full retirement age." This benchmark age is different for successive cohorts of retirees. The PIA is also the monthly benefit amount for a disability insurance recipient. In the case of an old age or retirement benefit the monthly payment may, in fact, be greater or lesser than the primary insurance amount, depending on the age at which benefits were begun. But that age adjustment is applied against the PIA. Benefits for family members (spouses, children, parents) are all set at stipulated percentages of the worker's PIA. For example, the base benefit for a surviving spouse (widow or widower) is equal to 100 percent of the deceased's PIA (again subject to adjustment depending on the age at which the survivor begins benefits). The base benefit for a child of a disability benefit recipient is by contrast 50 percent of the insured worker's primary insurance amount.
The primary insurance amount (PIA) is calculated to correspond loosely, although not precisely, to the worker’s level of covered earnings over a working lifetime. Higher levels of covered earnings produce higher PIAs; lower levels yield lower ones. Earnings are not averaged without regard to when they were acquired. Thus, they are said to be indexed. Earnings from earlier years are adjusted upwards to take account of general increases in national earnings levels. The indexing year for a worker is the year two years before his or her year of eligibility, two years before to assure that the necessary national wage data are available. The resulting average indexed monthly earnings (AIME) figure is the basis for calculation of an individual's primary insurance amount.
An important feature of the AIME formula is that for many workers it will rest on fewer years of actual or potential earnings than they in fact have. For a retired worker, who may have worked 40 years or more, the AIME will rest on only 35 of them. To the extent that there are surplus years (in this case 5 or more), the years with the lowest indexed earnings are left out. If there is a period of disability, the so-called "disability freeze" will remove it from the AIME calculation. On the other hand, individuals with fewer years of earnings than called for by the AIME formula will end up with an average reduced by a number of zeros. 42 U.S.C. § 415(b).
The average indexed monthly earnings figure is converted to the individual's primary insurance amount through a series of multipliers. They apply to successive levels. There are three such multipliers and levels. The very first band of AIME generates a 90 percent return in PIA, while indexed earnings at the top end yield only 15 percent. A middle band is set at 32 percent. 42 U.S.C. § 415(a)(1)(A). The boundaries separating the bands in which these different multipliers operate are known as bend points, and they are among the program parameters automatically adjusted each year. 42 U.S.C. § 415(a)(1)(B). The central feature of this formula is that it produces greater earnings replacement for those with lower average indexed monthly earnings. In addition to this skew in the general PIA formula, there is a special benefit provision boosting benefits for steadily employed low-income workers. 42 U.S.C. § 415(a)(1)(C).
The amounts of the several different types of benefits are, before adjustment or deductions, specified in terms of percentages of the insured worker's PIA. Primary benefits, that is Old Age Insurance (retirement) benefits and Disability Insurance benefits, are set at the full amount, 100%. 42 U.S.C. §§ 402(a), 423(a)(2). Surviving spouse benefits are as well. 42 U.S.C. §§ 402(e)(2), 402(f)(2). Surviving parents receive 82.5% if there is only one eligible parent, 75% if there are two or more. 42 U.S.C. § 402(h)(2). Surviving children and a younger surviving spouse eligible while caring for eligible children have benefits set at 75% of the primary insurance amount. 42 U.S.C. §§ 402(d)(2), 402(g)(2). The children and spouse of an old-age or disability benefit recipient have benefits set at 50% of the primary insurance amount. 42 U.S.C. §§ 402(d)(2), 402(b)(2), 402(c)(2).
The Agency maintains a record of earnings for all individuals working in covered employment or self-employment. This earnings record is based principally on data furnished by the Internal Revenue Service. 42 U.S.C. § 405(c). That means that it rests ultimately on tax returns filed by the individual or the individual's employer. This official record of earnings, including amounts and the period of time to which they relate, is the starting point for eligibility and benefit determinations. Individuals can review this record and request corrections in it. A failure to do so promptly can lead to the record's being conclusive or presumptive evidence on whether the individual had earnings during a particular period and, if so, how much. The Act sets a time limit for requesting correction of 3 years, 3 months, and 15 days after the year in question. 42 U.S.C. § 405(c). Each year, the Agency sends an earnings record statement, together with a projection of benefits, to all individuals 60 or older for whom it had a current mailing address who have not set up an online account and are not yet receiving benefits. Those with an online account receive the statement by email.
When a worker has been employed by an employer who did not pay the Social Security tax or report the employment, the worker's claim to a subsequent benefit may require confronting the evidentiary weight of the official earnings record. Occasionally, usually when the issue is application of the excess earnings test, an individual may argue that the Agency must accept the official record as evidence of the level of earnings. In those instances the Agency is in the position of attacking or seeking to change its own record, often after the expiration of the 3 years, 3 months, and 15 days time limit.
Earnings records that reflect self-employment are drawn from the individual's own tax returns. Consequently an absence of reported self-employment earnings for a period or an amount of such earnings above zero that was not the subject of a corrected tax return within the period of limitations of 3 years, 3 months, and 15 days, will in most cases be binding on the individual. Greater leeway to correct the records by establishing earnings not shown by them exists in the case of wages paid by an employer, especially when the official earnings records show no earnings from that employer (as distinguished from some amount, later asserted to be erroneous). 42 U.S.C. § 405(c).
For years prior to 2002, the earnings record for a member of the uniformed services included more than the individual's "basic pay," even though that was the only portion of his or her compensation on which the Social Security tax was paid. The additional wage credit entered on top of that amount scaled according to the individual's basic pay. No credit was provided for an individual with less than $300 in basic pay for the year. Beyond that threshold, a credit of $100 was added for each $300 of basic pay, up to a maximum credit of $1,200 for the year. 42 U.S.C. § 429. Congress ended those credits for years after 2001.
Prior to 1957 the uniformed services were not covered on a contributory basis by Social Security; however, those who served during the period 1940-56 received certain noncontributory wage credits. Special wage credits are also provided for the U.S. citizens of Japanese ancestry of working age who were interned during World War II. These credits are calculated to approximate the earnings they were denied by virtue of their internment. 42 U.S.C. § 431. Finally, the Act still contains provisions authorizing benefits to generations of workers who had little chance for Social Security coverage. 42 U.S.C. § 428. These several dated provisions have no relevance for cohorts now reaching retirement age.
In most Social Security settings it is important to know when earnings are counted for the provisions are framed in terms of amount of earnings during some period. Although minor exceptions exist, wages from employment are generally counted when received by the worker or, if earlier, when credited to the worker and available, without restriction, for withdrawal. 20 C.F.R. § 404.1042. Earnings from self-employment are counted in the period to which they relate as they are treated under the Internal Revenue Code. 20 C.F.R. § 404.1081.
Social Security employs a very expansive definition of wages. It provides that all remuneration for employment, no matter what it is called or how it is paid, must be and is counted as wages, up to an annual limit. Earnings from self-employment are defined as net income from work an individual does, not as an employee, but in pursuit of his or her own trade or business. The limit on maximum taxable and counted earnings for a year is subject to annual adjustment. 42 U.S.C. § 430. The maximum taxed and counted earnings amount for 2018 is $128,400.
Excluded from wages from employment are a variety of jobs held by young people, some work within a family setting, and, upon election, work for certain religious organizations. 20 C.F.R. §§ 404.1012 - 404.1039. A teen's babysitting wages are, for example, not counted. 20 C.F.R. § 404.1038. There are also a number of specific situations in which income that would otherwise be treated as wages from employment is instead counted as self-employment income. 20 C.F.R. § 404.1068. These situations parallel comparable provisions governing the Social Security tax.
In Social Security Bd. v. Nierotko, 327 U.S. 358 (1946), the Supreme Court construed "wages" under the Act as including "back pay" granted to an illegally discharged employee.
Numerous Social Security Rulings cover particular issues of wage or self-employment income treatment. Prior to 1988, the Act required the Social Security Administration to accept the employing agency's characterization and records of remuneration for federal employees. It now specifically authorizes the Agency to determine whether particular remuneration constitutes wages from employment.
The work of most state and local government employees is covered by Social Security. But, with the exception of transportation workers for whom coverage is mandatory, that coverage is a consequence of individual state decisions implemented by agreement. 42 U.S.C. § 418. Having chosen to bring a sector of public employment under Social Security, however, a state cannot later withdraw coverage. 42 U.S.C. § 418(f).
Public pensions based on uncovered state or local government work give rise to a reduction of Social Security benefits. The Windfall Elimination Provision (WEP) modifies the standard formula for calculating an individual's primary insurance amount (PIA). 42 U.S.C. § 415(a)(7)(A). The modification applies when a wage earner with earnings covered by the social security system also has "noncovered" earnings, typically from federal and state civil service employment. It applies only to individuals who first become "eligible" for a pension based on noncovered employment after 1985.
The Act also provides for a reduction of spouse benefits and divorced spouse benefits when the individual receives a pension based on uncovered government work (for the federal government or a state or local government). 42 U.S.C. § 402(k)(5). If the pension is paid in a lump sum, that lump sum is converted into a monthly amount for purposes of this calculation. Prior to 2004 the determination of whether or not the government work on which the pension is based was covered by Social Security was made as of the last day of the individual's work for the governmental organization. The Act was amended that year to require five years of uncovered work.
Since return on investment and income from savings as distinguished from income from work do not count toward Social Security entitlement, wages and earnings from self-employment for an individual may be significantly less than the individual's taxable income. 20 C.F.R. §§ 404.1082 - 404.1084.
All publications of the Social Security Administration are linked directly to the Agency's site.
Links of citations to provisions of the U.S. Code and regulations codified in C.F.R., together with those to Supreme Court and Court of Appeals decisions, employ the Read It Online or RIO service of the Cornell Legal Information Institute. They, thereby, present users with a choice among legal information providers. Choices include the comprehensive fee-based services, Westlaw and Lexis, and a number of free options. To see how this works follow one or more of the following linked references:
In varying ways and to varying degrees the services to which the links provide access include tools for checking on the currency of the cited section or case. (Has the cited section been amended or the cited decision overruled or questioned since this guide was written?) They also provide the best means for retrieving directly relevant decisions of the U.S. District Courts. The “precedential” decisions of the U.S. Courts of Appeals represent only a slim portion of Social Security case law. Following key regulations or appellate decisions into and through Lexis and Westlaw, on the one hand, or Google Scholar, on the other, can lead you to district court decisions that have interpreted them.
This is the fifth electronic format in which the materials integrated here have appeared. The work was first launched in 1991 on LEXIS where it lived awkwardly and for only a short time. (At that point LEXIS lacked hypertext capability and delivered all content through small screen-fulls of character-based monochrome display.) That company's decision not to proceed with its original plan of placing the treatise and its accompanying library of primary law materials on CD-ROM, prompted their migration to the Thomson Corporation's Clark Boardman Callaghan division, which released "Social Security Plus" in 1994. Thomson's acquisition of the West Publishing Company in 1997 brought "Social Security Plus" and a competing West CD-ROM into uncomfortable proximity. Rather than allow their merger, the author brought the compilation to the open Web, as part of the Legal Information Institute's online collection. It lived there for a decade, evolving as the legal resources on the open Web expanded. In 2012, it morphed into a wiki format. The closure of the wikispaces.com site in 2018 prompted the latest conversion.
This segmented form (a series of topical guides) is offered in hopes that some or all of the guides will provide a useful base on which others can build, update, and improve. Note the licensing terms below.
© Peter W. Martin, 2018. This work is licensed under the Creative Commons Attribution-ShareAlike 3.0 License. To view a copy of this license, visit https://creativecommons.org/licenses/by-sa/4.0/. As noted above the author not only authorizes redistribution, reuse, revision, and adaptation of this material (with attribution, please) but encourages it.