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Social Security is NOT a savings plan. It is an INSURANCE plan.The basis for your Social Security benefits is your average indexed monthly earnings (AIME) — your average monthly wage (adjusted for wage inflation) for your top 35 earning years.
You get a percentage of this wage, based on your income level and the age at which you start collecting benefits.
Lower-earning workers get a higher percentage of their earnings, than do higher-earning workers.
If you retire at the official full retirement age, your monthly benefit amounts would be: (figures based on 2014 rates)
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If you retire before than your full retirement age, you would receive a lower monthly benefit. If you retire after than your full retirement age, you would receive a higher monthly benefit.
The reason there is a maximum benefit amount of $2,801 is that there is a maximum monthly wage that is subject to Social Security tax—currently $9,967.
If this limit were removed, there would be NO LIMIT on the monthly benefit. A worker with an average monthly wage of $2 million would be entitled to a monthly benefit of $301,306.
Social Security is NOT a savings plan. It is an INSURANCE plan.Social Security benefits are NOT based on how much money you paid into the plan, but on the average amount of money you earned per month (and paid Social Security taxes on) over your working lifetime.
Although there is a connection between these two amounts, they are not the same thing.
Example 1: Mary, born in 1950, started working in 1966, when the Social Security tax rate was 3.95%. Over her working lifetime, she paid progressively more Social Security tax, because the tax rate was raised three times during her working lifetime.
Mary's average monthly earnings, adjusted for inflation, were $4,000. Her Social Security benefits will therefore be based on this average wage.
Example 2: Susan, born in 1970, started working in 1990, when the Social Security tax rate was 6.2%. Since the Social Security tax rate has not changed since 1990, Susan has paid 6.2% over her entire earning lifetime, so that she will pay more Social Security taxes over her working lifetime than Mary did.
Susan's average monthly earnings, adjusted for inflation, are also $4,000. Her Social Security benefits will therefore be the same as Mary's, even though she paid more in Social Security taxes.
WORKER YEAR OF BIRTH YEAR STARTED WORKING BEGINNING SS TAX RATE ENDING SS TAX RATE AVERAGE WAGE SS BENEFIT BASIS Mary 1950 1966 3.95% 6.2% $4,000 $4,000 Susan 1970 1990 6.2% 6.2% $4,000 $4,000
Social Security is NOT a savings plan. It is an INSURANCE plan.
This website presents summary information on Social Security, in a pictorial, easy-to-understand format.
For detailed, official information on Social Security, visit the Social Security website, or contact your local Social Security office or your Congressional representative.
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