Low earners often get more from Social Security benefits than they pay in, while high earners get less. One-income couples also fare better
What will you receive in Social Security benefits compared with the taxes you pay in?The short answer: Low earners often get more than they put in, while high earners get less. By one estimate, the turning point is currently around $65,000 for a single worker and double that for couples earning similar pay.
This question has come up since the Social Security Administration last week announced a payroll-tax increase affecting 12 million higher-income workers. On Jan. 1, the wage base rises to $127,200—a 7.3% increase over this year’s level of $118,500. The wage base is the amount of a worker’s pay subject to Social Security tax, which is a flat 6.2%, and the upper limit is known as the “cap.”
The cap generally inches up each year, but next year’s increase is particularly sharp because the 2016 adjustment was postponed when Social Security benefits stayed flat for the year.
As a result, workers subject to the hike will owe up to $539 more in 2017. The higher cap also affects the employer’s portion of the tax and what’s owed by self-employed workers, although they are allowed income-tax deductions that can offset the impact.
The more generous benefits for lower-wage workers have long been a feature of the Social Security system, said Eugene Steuerle, a former Treasury official in the Reagan administration who is now with Tax Policy Center in Washington. “The idea has always been to replace a greater percentage of lower-earners’ wages,” he said.
To give a sense of how Social Security works for lower earners compared with higher earners, Mr. Steuerle provided data on Social Security taxes paid and expected lifetime retirement benefits for categories of workers over many decades. The results are in 2015 dollars and assume a 2% rate of return on savings after inflation. They include the employer’s as well as employee’s portion of the tax but don’t include income tax owed on benefits by higher-income retirees.
For simplicity’s sake, the data assumed no change in income or marital status over time, and weren’t adjusted for life expectancy based on income.
Still, the results are revealing.A one-earner couple retiring in 2020 with low wages—$22,500 in 2015 dollars—would have paid the equivalent of $129,000 in 2015 dollars in Social Security taxes. That couple can expect to receive lifetime benefits of $309,000 in 2015 dollars, more than twice what the worker paid in.
By contrast, a couple retiring in 2020 in which both spouses earn the same pay and who have always earned wages at the cap or higher ($118,500 in 2015 dollars) will have paid in some $1,358,000. But on average they’ll receive benefits worth $1,020,000, or about 75% of what they paid in.
Single workers often pay taxes and receive benefits that are about one-half of those for dual-earner couples with equal pay.
Lower-wage workers aren’t the only category of “winners” under Social Security. One-earner couples, and couples in which the spouses earn vastly different amounts, often come out ahead of dual-earner couples who have similar pay. So do retirees with much younger spouses and those with minor children when the retiree is collecting benefits.
Social Security “losers” often include single parents, who suffer because they miss out on spousal benefits that they in effect pay for, says Mr. Steuerle. In addition, people who stay in the workforce longer than 35 years typically see very little increase in their benefits as a result of the extra years of taxes paid.
Another large category of “losers,” say experts, is younger generations compared with older ones. In 2010, Social Security began paying out more in benefits than it is collecting in taxes. The decline in the number of workers per retiree from three to two as baby boomers retire is making this problem worse.
To stabilize the system, “taxes will have to go up or benefit growth will have to be trimmed,” said Stephen Entin, an economist and former Treasury official during the Reagan administration who is now with the Tax Foundation in Washington. “Either way, the return on the contributions for all workers will be depressed compared to current levels over time.”Write to Laura Saunders at email@example.com
Nobody — not even Social Security itself — knows for sure what you’ll get until you actually file for benefits. Still, the Social Security Administration is in a great position to provide you with its very best estimate and is happy to do so.
How to get your personalized estimate of your Social Security benefit
The fastest way to get your hands on your personalized Social Security estimate is by creating a “My Social Security” account via this link . Once you create the account, you can access your most recent Social Security statement, which shows you the best available estimate of what you’ll get.
Image source: Social Security.
In addition to your estimated benefit, the statement shares what your earnings history looks like, what would happen if you collect early or late, and what survivor benefits are available if you pass away. On top of that useful financial data, the statement does include a warning about the pending shortfall of Social Security funding and how that puts a portion of your benefits at risk.
What if you don’t want online access to your Social Security account?
If due to privacy, identity theft, or other concerns you don’t want online access to your Social Security account, you can block it through this link . If you do so, nobody — not even you — can retrieve your Social Security data online.
If you block online access, you can still get a copy of your statement via mail. Simply fill out form 7004 ( available here ) and mail it into Social Security at the address provided on the form. Within four to six weeks, your statement should arrive. In addition, if you don’t have a Social Security online account, Social Security will mail you your statement at ages 25, 30, 35, 40, 45, 50, 55, and 60 or older, up until you begin collecting.
Know what you can expect from Social Security
While Social Security provides the foundational retirement benefits for millions of Americans, the typical retiree currently receives $1,350 per month from the program. Over time, benefits will likely grow at about the rate of inflation, and the program is facing a massive financing shortfall that will cut benefits to about 79% of expected levels in 2034 if nothing is done about it. Your specific benefit is based on your or your spouse’s earnings record, but in general, benefits run about that level and the program’s shaky financial footing affects all Americans.
With your benefit information in hand, you can better figure out how much additional money you’ll need to cover your expected costs in retirement. With that, you can start to build the plan that can take you to and through a comfortable retirement.
The $15,834 Social Security bonus most retirees completely overlook
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The slight increase comes after no cost-of-living adjustment (COLA) for 2016.
Social Security benefits will rise a scant 0.3% in 2017, the government announced Tuesday morning.
Social Security says the cost-of-living adjustment will add $5 to the average monthly payment for all retired workers, which is $1,355 before the raise.
The Social Security Administration bases the annual cost-of-living adjustment (COLA) on a consumer price index called the CPI-W that tracks the prices of goods and services–including energy, food, and medical care–consumed by urban workers. Relatively low inflation has meant a small uptick in the index from last year.
Inflation was so low last year that Social Security payments didn’t increase at all from 2015 to 2016. The average annual raise since 2000 has been 2.3%, which would have added $28 a month at current benefit levels, according to the American Institute for Economic Research.
Most Social Security recipients will see the full increase in their benefit go to higher charges for Medicare Part B coverage.
Some advocates for older Americans say the inflation measure used to calculate the Social Security COLA doesn’t accurately reflect this population’s expenses. Years of low increases are having a “long-term impact” on retirees, says Mary Johnson, a Social Security policy analyst and researcher for the Senior Citizens League, a nonpartisan lobbying organization. “We have a growing concern.”
Critics including the Senior Citizens League say the CPI-W gives comparatively low weight to the prices of goods and services that older Americans consume the most. While it includes medical care, the index also includes prices for entertainment and electronic goods, which seniors typically consume less than the typical urban worker. This year’s cost-of-living raise will not keep pace with the 5.1% increase in the cost of health care from August 2015 to August 2016, as measured by the Bureau of Labor Statistics.
Medicare beneficiaries who collect Social Security typically get their Medicare Part B premium deducted from their monthly Social Security check. According to federal law, Social Security payments generally must not decline from one year to the next. This “hold harmless” provision means the dollar increase to Medicare Part B premiums cannot exceed the dollar increase to most beneficiaries’ Social Security checks. (Last year, when there was no Social Security COLA, the Medicare Part B premium remained flat at $104.90 per month for beneficiaries held harmless.)
The small cost-of-living adjustment for 2017 is likely to result in outsize premium increases for some other Medicare recipients who aren’t covered by the hold harmless rule, including those newly enrolling for 2017, those on Medicare who have not yet claimed Social Security, and higher-income seniors subject to the income-linked surcharge on Part B premiums.
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Such individuals will see big premium increases because the government’s total costs for Part B, which covers doctor visits and other outpatient services, continue to climb. The government must raise Part B premiums and concentrate the increase among the roughly 30% of beneficiaries not held harmless.
Officials have predicted a 22% increase in Part B premiums for the these beneficiaries. Congress could act to prevent this full jump, though. Last year lawmakers lowered the Part B increase from 52% to 16% for those beneficiaries not held harmless. Thanks to a $7 billion loan from the U.S. Treasury, for 2016 many of those beneficiaries pay $121.80 monthly for Part B.
Last year, the Centers for Medicare & Medicaid Services (CMS) announced the 2016 Part B premium on Nov. 10. “CMS is currently reviewing the Social Security cost-of-living adjustment amount and other data,” says a spokesman. “As in prior years, Medicare Part premiums will be announced this fall.”
Medicare Advantage premiums for 2017 have already been finalized. Medicare open enrollment runs from Oct. 15 through Dec. 7, and during this time beneficiaries can switch from Original Medicare to Medicare Advantage and vice versa, and add or change Part D drug coverage.