Social Security: Who Gets the Best Deal on Benefits?

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.

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.

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.

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.

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Read/Post Comments (3) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2014, at 2:08 PM, gadfly1000 wrote:

    The premise is rather foolish, as Caplinger even admits when he acknowledges that people who become permanently disabled early in life are hardly enjoying an "advantage" from Social Security benefits.

    Likewise, there's no great advantage to earning $9800 annually on average, far below the poverty level, because you get 90%, putting you even deeper into poverty, from Social Security.

    Finally, "especially as two-earner families have become more commonplace." is another meaningless statement since a spouse gets a percentage of the primary earner's benefit or the spouse's own benefit, BUT NOT BOTH. This takes care of Caplinger's two earner dilemma.

  • Report this Comment On August 30, 2014, at 3:02 PM, greyhound44 wrote:

    Those who retire early (as I did at age 58.75) after having paid MAX SS portion of FICA for 35 + years (none since) and now take MAX SS Retirement Benefits (reduced for age) since age 62.

    My parents lived into their 80's (dad was 88).

    I plan to live to be 100.

    Have collected $150,059.70 from SS, and shall get another $1760.90 on 9 Sept while on an Alaskan cruise.

    Never paid a dime in income tax on my SS income.

    My IRAs are now $2,042,536.30 and my net worth is high 7's/low 8's on any given day.

    retired expatriate

  • Report this Comment On August 30, 2014, at 4:55 PM, nzk91g wrote:

    I'm not on this list. I've paid the maximum FICA since I started working. Will not get anywhere near the benefit that those dollars would earn if invested privately.

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Dan Caplinger

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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