Social Security

Misleading on Social Security

Read the following from the Motley Fool via USA Today

Even income inequality has reared its head and hurt Social Security. We’re witnessing a greater percentage of earned income being exempted from Social Security’s payroll tax – $300 billion in 1983 versus $1.2 trillion in 2016 – while also seeing the well-to-do live significantly longer than lower-income folks whom the system was designed to protect. Ultimately, it means a lot of Social Security income is winding up in the hands of the wealthy.

Let’s be clear, “wealthy” in this context is earning more than the Social Security taxable wage base, currently $128,400 and going to $132,900.

The benefit provided by Social Security is calculated on earnings up to the taxable wage base so with the same earnings record a person earning $132,900 and one earning $1,000,000 will receive the same benefit in retirement and have paid the same in taxes into the system (assuming consistently earning the maximum taxable).

Social Security income winds up in the hands of people who earned it (and many who didn’t) and no more to the wealthy, who by the way pay considerably more in payroll taxes and then income taxes on their benefits.

In addition, the benefit formula provides a higher benefit on earnings to the lower income worker.

The 2019 formula is:

  • 90% of the first $926 of AIME.
  • 32% of AIME greater than $926, but less than $5,583.
  • 15% of AIME greater than $5,583.

AIME = average indexed monthly earnings.

As you can see there is a significant lower relative benefit provided for anyone earning more than $66,996 a year ($5583 x 12). In other words for those whose income reaches and exceeds the taxable wage base nearly half their average income earns only 15% in Social Security benefits.

A case can be made to increase or even eliminate the taxable wage cap as long as the earned benefit increases proportionally otherwise Social Security moves from a funded benefit to a form of welfare.

Even now as you can see from the formula, higher income earners subsidize others. In addition to payroll taxes, this is true because higher earners pay income tax on their Social Security benefits most of which goes toward paying SS benefits (the rest goes to subsidize Medicare).

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5 replies »

  1. “A case can be made to increase or even eliminate the taxable wage cap as long as the earned benefit increases proportionally otherwise Social Security moves from a funded benefit to a form of welfare.”

    SS is a welfare system, as no one who lives into their 80s paid for their benefits with total FICA taxes paid while working. Most get everything paid in taxes back in less than 8 years.
    I never made more $25,000 per year from 1971 to 2006 and only had 27 years of income subject to the FICA tax. Total FICA taxes paid = $35,082. I used my SS record of taxes paid each year and used a inflation calculator and adjusted for inflation total FICA taxes paid = $84,550. I will have all of it back 5.5 years. I have no problem with the government adjusting the system to ensure no benefit cuts in 2034. I would like to see SS changed so that each family gets the same monthly benefit.

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  2. Perhaps my comment doesn’t directly talk about your post, however, I would like you to discuss this further as this seems like an unfair practice of calculating SS benefits and I would like to know who set that formula and why it is in place. I was calculating my 2.8 COLA coming up and notice something I want to comment about. My COLA, not mentioning dollar amount but the calculation has an $.80 change amount in the calculation which SS is telling me will be rounded to the lower dollar amount each month This happens when COLA’s are calculated. SS, instead of rounding off to the nearest dollar, rounds off to the lower dollar, which I always thought that anything above $.50 rounds to the higher dollar. In reviewing past COLA’s, this has occurred in many years, shorting me and the American SS beneficiaries of the higher dollar rather than the lower of the benefit. This is happening to everyone claiming SS,which it seems like SS is shorting the American people every time this occurs. This also lowers the amount for future COLA’s when the calculation is put to the lower dollar rather than the higher when calculating future benefits that are calculated on the current benefit Who set the law that SS can round off to the lower dollar when in most instances anything above $.50 is normally rounded to the next dollar when rounding? In my case over the year it doesn’t amount to much, however over the years it does amount to a lot. How can a law be present for SS to be allowed to round to the lower dollar when it is a normal practice to round to the higher dollar for any amount above $.50?. If this is being done to all SS recipients, the American people lose quite a lot over the years. I would like to know who set this policy and why is SS allowed to round off payments to the nearest lower amount rather than the higher dollar if the amount with change is above $.50. Can you look into this and advise. I would like to know who set that law for SS and how they can use that practice which is taking $’s and future calculations of COLA’s from the American people Thank you

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    • According to the SS Administrations, a COLA increases a person’s Social Security retirement benefit by approximately the product of the COLA and the benefit amount. The exact computation, however, is more complex.

      Each Social Security benefit is based on a “primary insurance amount,” or PIA. The PIA in turn is directly related to the primary beneficiary’s earnings through a benefit formula. It is the PIA that is increased by the COLA, with the result truncated to the next lower dime.

      Example
      If the initial PIA is $1,515.50 and it is increased by a 2.8-percent COLA, the new PIA would be $1,557.90 after truncation to the next lower dime.

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      • Understand your comment but then the 1557.90 turns into 1557, not 1557.90 in that situation $.90 is lost, am I correct with that? and each COLA year, are they using the $1557,90 or $1557. which is the rounded off figure to the lowest dollar. which is what we are getting in our checks or do they go back to the initial amount granted without rounding off to calculate?

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  3. Your pie chart caught my eye. Of the people who receive benefits, 31% are not retired workers although I suspect that some of the spouses might be. I looked at SSA.gov site and discovered that the 13.8% which are disabled have an average age of 54. This is far less them their normal retirement age of 67. This is another 13 years (average) extra payout from the trust fund just to reach retirement age and could be considered an unfunded addition to the Social Security system in 1960 because the plan never took these costs into consideration when setting up the payroll taxes for the trust fund in 1935. One would hope that the trust has since made adjustments for these additional benefits.

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