social security benefits
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- Last Updated: Tuesday, 17 May 2022 21:19
- Published: Tuesday, 17 May 2022 17:57
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social security benefits:
If you have worked in USA, you know it hurts to pay Social Security (SS) + medicare taxes, that average about 7.5% of your wages. It's 6.2% (upto a certain threshold) for your SS taxes and 1.45% for medicare taxes (with no threshold, i.e you are taxed on your whole salary).
For Social security + medicare taxes that you pay during your working career, it's good news if you make it past 62. You start getting some of the SS taxes back as monthly paycheck. If you live long enough and your wages weren't high to start with, then you would get a lot more than what you paid into SS taxes.Same goes for Medicare taxes, where a major portion of your medical bills are paid by medicare, with a minimal amount coming out of your pocket.
Not only the retirement benefit, but SS also pays out disability benefits. This is particularly helpful, if you get disabled or pass away. You or your family can collect disability benefits so that they can at least survive, even if you or your spouse can't do a paying job.
The link to official SS govt site is: https://www.ssa.gov/
Here you can open an account and track your SS benefits that would get in retirement or on getting disabled. Make sure everything over here is accurate wrt SS taxes and earnings reported. If you find a discrepancy, contact the SS office. They also send you a yearly statement, though I haven't been receiving them for a while (maybe they stopped sending)?
Maximum taxable Wages for SS:
As long as you are in the workforce, you pay SS taxes. If you are employed by someone else, you pay 6.2% od SS taxes, and your employer pays 6.2% of SS taxes. However, if you are self employed, you pay full 12.4% of SS taxes. This 6.2% or 12.4% only applies to first $100K-$150K or so of your wages, any wages after that aren't hit with the SS tax. Every year, a threshold is set for max wages that will be subject to SS taxes. It's adjusted every year by wage inflation rate.
The history of max taxable wages is here: https://www.ssa.gov/policy/docs/policybriefs/pb2011-02.html#:~:text=Social%20Security%27s%20tax%20max%20has%20evolved%20throughout%20the,future%20benefit%20adequacy%20for%20middle%20and%20higher%20earners.
For year 1970, max wages subject to SS taxes was about $8K, while for 2000, it was $78K, implying a raise of about 8%/year. From 2000 to 2022, it went from $78K to $147K, which is lot slower rise of 3%/year. The chart in the link above also shows that only 6% of the people pay the max SS tax, as their wages go over the SS max wage limit. This 6% number has remained constant over last 15 years or so. So, it looks like wage inflation being priced in the formula for max SS wages is working as it ought to be. So, if you are paying the max SS tax every year, you can take console in the fact that you are in the top 6% of income earners (based solely on wages, and NOT on other income as dividend, capital gain, etc, as SS taxes don't apply to those). With a workforce of 160M people in USA, this works out to about 10M people who have wages over > $150K for year 2022. The number of people having income of over $150K in 2022 may be lot more than 10M, as a large number of employed or unemployed people may have passive income as renting, dividends, capital gains, etc.
SS payout:
Now the important part - how much do you get in SS benefits once you retire or get disabled. Let's look at the retirement benefits.
SS benefits are calculated based on your 35 highest-earning years in the workforce, and are adjusted for inflation. If you don't have 35 years of earnings, zeros are averaged in for the years you didn't work at a job in which you paid into Social Security. The proportion of your income that is replaced by Social Security varies based on how much you earn. Consider a worker who turns 62 in 2011. To calculate his benefit, the first $749 of his average monthly earnings is multiplied by 90 percent, the next $3,768 by 32 percent, and the remainder by 15 percent. The sum of these three amounts equals his initial monthly payment amount. Workers also have cost-of-living increases added to their benefit beginning at age 62, even if they don't begin to receive benefits until a later year.
If you have worked for at least 10 years in USA with earning of > $5K/year, you will have accumulated 40 points (4 points per year is earned for taxable wages of $4K/yr). Having 40 points entitles you as well as your spouse/kids to get SS benefits. You don't have to work consecutively. As long as it's 10 years of wages, you will be eligible, no matter what your citizenship or visa status is. As an ex, if an Indian worked in USA for 10 years on H1B visa, and then goes back to India and settles in India thereafter, he would still be eligible for monthly paycheck once he reaches age 62. SS tax is your money, which you are eligible to get back in retirement. Since the money from SS fund is distributed in a social way to help poor people more than rich people, rich people get paid less than what they paid in, while poor people get paid more than what they paid in.
In June 2011, the average Social Security benefit was $1,180.80 per month. The maximum possible benefit for a worker retiring at age 66 in 2011 is $2,366. But to get this amount, the worker would need to earn the maximum taxable amount, currently $106,800, each year after age 21 for at least 35 years (as of 2011).
Here's the calculator on SS.gov website to show your retirement benefits, customized to your earnings: https://www.ssa.gov/benefits/retirement/planner/AnypiaApplet.html
Other quick calculator to give you a ballpark is here: https://www.ssa.gov/OACT/quickcalc/
As per above calculator, if you were born in 1960, and are retiring in 2022, and paid max SS tax for 35 years of your life, you would get $2K/month (in 2022 dollars). Your spouse will get the same amount if she also has same credentials as yours. Even if the spouse never worked, he/she would still be eligible for half of the SS benefits of her working partner. So, in this case, if the working partner got $2K/month in retirement, then non working partner would collect $1K/month if retiring in 2022 (i.e over 62 yrs of age). That would net a SS income of $3K/month.
However, if you earned only $5K/yr for your entire working life, you would get only $170/month. If you earned $50K/year (which is median wages), you would get about $1K/month in SS paycheck.
You may see that the SS paycheck is not enough to cover rent, not to mention food, utilities, transportation, etc. In states like Texas, it may not be enough to even cover the property tax on your house (even though you owe no mortagage and it's paid off). That's why you need other source of income such as 401K or your personal savings to survive in retirement. SS paycheck is just going to be enough so that you don't starve, though you might still be homeless.
Taxes on SS benefits:
Here comes the nail in the coffin - you would have to again pay federal income taxes on any SS paychecks that you receive in retirement or during your disability. It depends on your other income during retirement that eventually decides how much of your SS benefits would be taxed and at what rate.
Taxes on SS benefits are on this link: https://www.ssa.gov/benefits/retirement/planner/taxes.html
Most likely, 85% of SS paycheck is taxable assuming total income of > $50K in retirement.