Social Security is vital for retirees in every income class, but for low-income Americans, Social Security is especially important. Part of the reason is that low-income Americans fare better than their higher-income counterparts, at least in the sense that they get a higher percentage of their average career earnings in benefit payments.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at why low-income Americans fare better under Social Security. Dan notes that Social Security is progressive, with low-income recipients getting as much as 90% of their average monthly earnings back in benefits. Meanwhile, higher-income recipients get successively lower percentages of their earnings, with benefits rising as little as $0.15 for every $1 of average monthly income. As a result, Dan notes that according to figures compiled by The Wall Street Journal, the poorest 20% of retirees get about 77% of their income replaced by Social Security, compared to just 32% for the richest 20%. Recent proposals have suggested making Social Security even more progressive, calling for benefit increases for recipients with modest incomes while leaving higher-income individuals' benefits unchanged. Dan concludes that you have to understand how Social Security works in order to know when you've made the most of whatever benefits you'll be entitled to receive.
This article was updated on Dec. 28, 2015.