Understanding Social Security is not easy. In fact I suspect there is no individual who can fully explain all the intricacies of funding, benefit calculations, or claiming strategies.
In simple terms the benefit formula provides a higher percent of income on lower earnings and less as income increases. In terms of income replacement, the formula rightly favors the lower-income individual. If your average monthly earnings are $3,000 you will receive a higher income replacement from Social Security than a person with average monthly wage increase earnings of say $5,000.
You can see the current calculation below.
In 2016 a person will receive $1776.00 or 44% replacement on $4,000 average monthly income. However, keep in mind the average income probably is not the final income before retirement thus the actual replacement is lower in terms of current living standard.
Nevertheless, living in retirement with 44% or less income replacement will not cut it for most people. Experts say 70% to 80% replacement is necessary, I say even more.
Now let’s assume your average monthly income for Social Security is $8,000. Using the formula below, Social Security will replace 32% of your average income. Or, if you are “wealthy” and earn $15,000 a month, Social Security will replace 18.9% of average income (discounting any earnings above the $118,000 [$9833 per month] taxable wage cap.)
It would appear that the closer your income is to the taxable wage cap, the more you are subsidizing lower-income workers who receive a greater return on their money.
Someday the politicians will tell us what they mean by expand Social Security. Perhaps they mean extend part (a) of the formula so a greater portion of income uses a 90% factor. Or maybe they will say Social Security should replace 50% 60% or 70% of income. Yikes 🤑 will there be any take home pay left?
For all those who claim the way to go is simply tax more wages, keep in mind with Social Security playing less of a role in retirement income, the “wealthy” (actually the worst upper middle class) have a greater responsibility to fund their own retirement.
And talk about responsibility, many of the people complaining about inadequate Social Security benefits made choices over their working lives that led them to reliance on SS. Living above ones means, failing to save, failing to carry adequate insurance especially life insurance for a surviving spouse and in a few cases declining survivor benefits under a pension plan are all part of the American live for today way of life.
Categories: Social Security