Social Security: Who Gets the Best Deal on Benefits?

Find out who gets the biggest bang for their buck from Social Security.

Aug 30, 2014 at 9:02AM

Ssa Retiree Pic
Source: Social Security Administration.

Social Security helps millions of Americans make ends meet, with programs to help both retirees and those who've suffered disabilities during their careers. Yet as we examined last week, not everyone gets the same payoff from the Social Security taxes they've paid into the system over the course of their careers. Today, let's take a look at three groups of people who get the most in benefits compared to the amount they've paid into Social Security through payroll taxes.

1. Low-income workers
The amount you pay in Social Security taxes is directly proportional to the amount you get paid at work, and unlike income taxes, there's no initial amount of earnings that's exempt from Social Security taxation. Workers start paying into Social Security from the first dollar they earn, and they keep paying that same 6.2% tax up to the maximum wage limit of $117,000 for 2014.

But the way Social Security pays benefits in retirement is not proportional to the taxes you pay or the amount you earn. The way Social Security calculates the primary insurance amount on which it determines your monthly benefits gives recipients 90% of their average indexed monthly earnings up to $816. Above that, the amount of Social Security you receive falls to 32% from $816 to $4,917, and 15% above $4,917.

Ss Bend Point
Source: Author based on Social Security Administration calculations.

Therefore, in terms of maximizing Social Security benefits as a percentage of what you earn, about $9,800 in average annual income is the sweet spot. That can come either from 35 years of steady part-time work or from a shorter career of higher-income years that average out to that amount. Obviously, that amount won't maximize your total benefits overall, but those who earn more see diminishing returns from their Social Security taxes as their incomes rise.

2. Workers who become disabled early in their careers
Workers become eligible for Social Security disability benefits much more quickly than they do for retirement benefits. In general, workers between age 24 and 31 need to have worked at least half the time since they turned 21, and those between 31 and 42 need five years of work credits over the past decade. By contrast, retirement benefits don't kick in for most workers until they've worked at least 10 years.

Ssa Disability
Source: Social Security Administration.

If someone becomes disabled early in his career, his primary insurance amount is calculated not on the basis of a 35-year work history but rather on a much shorter period. That raises the PIA and therefore boosts the amount that person receives in disability benefits. In essence, the disability portion of Social Security works much more like insurance, where the vast majority of workers pay into the system without needing disability benefits, while an unfortunate few end up needing those benefits and getting, in some cases, far more than they paid into Social Security as a result.

3. Spouses with no work history
In the two situations above, you need to have paid at least some money in Social Security taxes. But the way Social Security deals with married couples means that spouses without a work history of their own can get benefits without paying any taxes.

Ssa Spousal Benefits

Source: Social Security Administration.

The rationale for spousal benefits goes back to Social Security's origins, when single-earner families were more common. Lawmakers wanted Social Security to provide for families as well as the primary earner, and spousal and survivors benefits ensured that other members of a worker's family would get financial assistance. Even divorced spouses are entitled to those benefits if they were married for 10 years or more.

Yet spouses only need to be married for a single year before becoming eligible to receive spousal benefits. That opens the door for potential abuse if couples at retirement age marry for convenience, as the new spouse with no earnings record can quickly take advantage of the other spouse's work history from long before they ever met. Even when benefits aren't the primary motivation for a marriage, some argue that the rules governing spouses are too generous, especially as two-earner families have become more commonplace.

Social Security is a useful program for all Americans, but it's inevitable that some people will make out better under Social Security than others. As talk of Social Security reform starts to get more urgent, you can expect policymakers to look at these and other aspects of the program to see where they can make improvements to how Social Security benefits are paid.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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