SOCIAL SECURITY BENEFITS

How do your annual earnings impact the total amount you will receive in social security benefits? 

More than 180 million Americans receive Social Security benefits, but how is the value determined? How do annual earnings contribute to the calculation?

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How do your annual earnings impact the total amount you will receive in social security benefits? 
CHRISTOPHE ARCHAMBAULT AFP

Each month, hundreds of millions of workers in the United States pay between 7 to 15 percent of taxable income in payroll taxes, which fund Medicare and Social Security benefits.

Federal tax law in the US stipulates that a worker should pay 7.65 percent of their wages in payroll tax and that the employer should contribute the same amount. However, many companies and organizations opt to take the additional 7.65 percent out of workers' wages, making them artificially low.

Regardless of one’s annual salary, the percent paid in payroll taxes is the same. However, after one makes around $130,000 in a year, their earnings are not subjected to the payroll tax. The logic being that those who make above this amount will not rely on Social Security benefits during their retirement. But this tax structure is regressive, meaning that it places a disproportionate burden on the poorest workers.

Nearly 1 in 10 seniors, meaning people older than sixty-five, live in poverty in the United States and completely rely on Social Security benefits. Social Security benefits are “modest,” and the federal government’s research arm, the Congressional Research Service, has stated that they “would not be sufficient to eliminate poverty for a large number of older Americans.”

How are Social Security benefits calculated?

To calculate your benefit amount, the Social Security Administration looks at your “average indexed monthly earnings during the 35 years in which you earned the most.” To account for inflation and other factors, the agency will take your yearly earnings and adjust them to “account for changes in average wages since the year the earnings were received.”

How are benefits calculated for those with disabilities?

Two programs run by the Social Security Adisntration help to "provide assistance to people with disabilities:" 

  • Social Security Disability Insurance: this program "pays benefits to you and certain members of your family if you are "insured," meaning that you worked long enough and paid Social Security taxes.
  • Supplemental Security Income: this program differs from the one described above in that it "pays benefits based on financial need."
The combination of these programs used to provide an income for disabled Americans differs on a case-by-case basis. To know if you are eligible to receive benefits as a part of these programs, one can use the "Benefit Eligibility Screening Tool," developed by the Social Security Administration.

What is the maximum benefit?

In January 2021, the average Social Security beneficiary for a retiree was received around $1,534.

In June 2021, the agency also reported that the average monthly benefit was $1,280

Retirees

The maximum benefit depends on the age at which one retired or began claiming benefits:

  •  Retired at sixty-two (earliest age for those who are not disabled to claim benefits): $2,324

  • Retired or began claiming benefits at sixty-five: $3,113

  • Retired or began claiming benefits at seventy: $3,895. 


Disabled people

In 2020, the maximum benefit was $3,011, according to the Injury and Disability Law Center.

How much are benefits expected to increase this year?

Those on a fixed income, like those who receive unemployment or social security benefits, are especially vulnerable to inflation and other forces in the market. To account for inflation, the government applies a cost-of-living adjustment, or COLA as it is more commonly known, to the benefit amount each year.

In the wake of the pandemic, prices have surged. As supply chains broke down early in the crisis, they have only started to be rebuilt, sending prices for everyday goods soaring. This has had a profound impact on many seniors who have reported organizations like the Senior Citizens League that they are “cutting their spending on prescriptions and groceries because that’s the last things they have left to cut.

Earlier this month, the Senior Citizens League released a projection that showed that the 2022 COLA could be as high as 6.1 percent based on the Consumer Price Index data from this year. Most expect the official announcement to be made in mid-October. Still, after a year of seeing their disposable incomes drop significantly, the SCL has argued that many seniors feel “overwhelmingly feel that a higher COLA would be long overdue.”