Social Security Income Cap

Factual Questions
21

In a long enough thread about Social Security, the probability that someone thinks SSI is a good abbreviation for Social Security (even though there’s nothing that the ‘I’ might stand for) approaches one, probably because they’ve heard of something called SSI and know it’s administered by the Social Security Administration…

SSI is Supplemental Security Income, and other than being administered by the Social Security Administration and having a very similar abbreviation, it has absolutely nothing to do with Social Security as it’s being discussed in this thread. It is funded from general revenues and mainly provides basic living assistance to people that (in general) do not qualify for actual Social Security.

22

Social Security benefits are extremely progressive, much more than the tax code itself it could be argued. When they determine how much you’re going to be given for SS, they first calculate your “average indexed monthly earnings” (AIME) which basically (though not exactly) calculates what percent of the SS cap your annual wages were each year, averages the largest 40 of those years’ percentages, and multiplies that times the current SS cap, then divides by 12 to get a monthly amount.

For the first $1,115 of your AIME as calculated for 2023, you get 90% of that per month. So if you made very very little money, you can expect your income to basically not fall at all if you take SS at Full Retirement Age. Most people make more than that, obviously, but that first $1,000 of SS income per month basically everyone gets, regardless of how little they made, assuming they worked most of their life. That’s generally going to be WAY more than the 12.2% tax that was levied on that income, which was likely a far lower number.

For the next $5.600 or so for 2023, you get 32% of your AIME per month. For anything over that up to the limit ($13.350) you get 15%.

Based on AIME being equivalent to the following annual levels in 2023 your expected annual SS benefit will be:

10k: 9k
20k: 14.16k
30k: 17.436
40k: 20.56k
50k: 23.76k
60k: 26.96k
70k: 30.16k
80k: 33.36k
90k: 34.97k
100k: 36.47k

And then up by 15% after that.

If you assume that the person earned over their life 20 times their annual indexed wages (just a random guess that’s probably a bit low) and lives 20 years in retirement, then the percentage they will receive compared to the SS tax paid by them and their employers based on current rates, without considering COLA increases:

10k: 726%
20k: 571%
30k: 467%
40k: 415%
50k: 383%
60k: 362%
70k: 347%
80k: 336%
90k: 313%
100k: 294%
110k: 278%
120k: 265%
130k: 254%

I have no idea whether my estimate for total wages to AIME wages is at all accurate, but it’s the same for everyone. You can compare the numbers to each other, but don’t assume they are realistic. Also remember that the SS tax rates used to be lower.

23

Yes…but…you probably paid into it for 45 years and will probably collect for ~12 years.

Also, your posted numbers make no sense to me. I am sure they are correct if you know how to read them. I don’t know how to read them.

Near as I can tell the maximum SS benefit is $54,660/year IF you wait to collect at 70 and IF you were putting the maximum amount in for at least 35 years.

If you live to the average age you will collect $382,620 at that maximum benefit.

SS takes 12.4% (6.2% from you and 6.2% from your employer) up to a wage of $160,200/year. So, $19,865/year max. If you work for 50 years your maximum payments into the system are around $993,250.

24

If you retire at the end of 2023, you will have paid less, because the cap increases almost every year.

25

To the OP, I recall CBO has investigated both increasing the cap at a rate high enough to keep a fixed percentage of earnings eligible for the tax (this percentage has dropped over the past decades) and at creating a “donut hole”, in which only earnings above the floating cap and under $250k are untaxed, with the hole being eliminated once the cap reaches $250k. I do not recall them looking at eliminating the cap entirely.