Social Security is a key source of income for many Americans, and a huge portion of the retired population of the U.S. gets the majority of the cash they need to pay their living expenses from Social Security. Recently, the presidential election campaign has pulled Social Security into the forefront, and candidates have taken positions regarding potential expansion of Social Security to provide greater minimum benefits for participants. Yet before policymakers look to implement changes, it's important to understand the current provisions for Social Security minimum benefits. Let's look at the details of the Social Security minimum benefits the program currently provides and then turn to proposals that might expand their coverage.
What Social Security minimum benefits are currently available?
For many retirees, there is no minimum amount for a Social Security monthly benefit. The formula that the Social Security Administration uses to calculate the primary insurance amount on which your monthly benefit is based looks at your average monthly earnings over the course of your 35 top-earning years, indexed for inflation. If your work history is shorter than 35 years, then the extra years during which you didn't work get filled in with zeros. As a result, those who have worked only a short portion of a full career can have very low average earnings, and that can create low monthly payments.
For example, say you worked five years earning $2,000 per month and then chose to leave the paying work force. Your earnings would total $120,000, and when you divide that figure over 35 years, you'd get average earnings of about $285 per month. That would equate to a primary insurance amount of $257, meaning that you'd get $257 per month in Social Security benefits if you retire at full retirement age.
However, Social Security does have what's known as a Special Minimum Benefit. In order to qualify, you have to have worked for at least 11 years. As you can see from the table below, the minimum benefit is based on a primary insurance amount that varies depending on how many years of creditable work you have in your career.
Although the chart has an effective date of December 2014, it is also contains figures that apply for 2015 and 2016, as well.
Why Social Security's minimum benefit doesn't work well
The catch with the special minimum benefit, however, is that the rules governing how much you have to earn to get credit for a year of work are different from the rules that the Social Security Administration (SSA) uses to determine eligibility for Social Security benefits generally. For instance, in 2016, a person has to have earned $13,230 in order to get a year of coverage for minimum benefit purposes. That amount is adjusted for inflation, so past years generally have smaller requirements. However, the amounts are large enough that it's not a foregone conclusion that low-income workers will necessarily qualify.
In fact, because the earnings requirements are so high, it's unusual that the minimum benefit table produces a higher Social Security check than the regular rules. In order to get a boost to your monthly benefit, you have to have earned very close to the minimum required to get creditable years of work. For practical purposes, therefore, the current minimum Social Security benefit is almost irrelevant.
Should there be a better Social Security minimum benefit?
As is typical in election-year politics, many proposals have suggested improving on Social Security. Some focus on the impact that taking time out of a career to raise children or act as a caregiver to other family members can have on Social Security benefits, and policymakers have suggested giving some form of credit for Social Security purposes for a certain number of years taken out of the workforce. The general idea is to replace what Social Security currently considers to be zero-earning years with some amount that reflects the economic value of the care they provide, with the impact of raising primary benefit amounts.
Other proposals have focused on changing benefit levels. The Save Our Social Security Act proposal would create a new minimum Social Security benefit at 125% of the poverty level, phasing in depending on the number of years worked. It would also increase benefits for recipients with 20 or more years of eligibility, giving those in their 80s additional money to cover the higher expenses that often accompany the latter part of retirement.
The challenge with proposals like these is that they cost money, and proposals to raise more revenue by increasing the wage base, the payroll tax rate, or taxation of benefits aren't as popular as suggested moves to boost benefits. Nevertheless, for those who believe a minimum Social Security benefit is vital, political wrangling could well create new provisions that would have more of an impact on guaranteeing retired Americans a baseline level of benefits from Social Security.
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.