The Center on Budget and Policy Priorities estimates that in 2023, a low earner receiving 45% of the average wage got $14,824 in Social Security payments. Conversely, a high earner received a far greater gain. An individual making 160% of the mean pay would receive $32,345 in Social Security benefits per year. Higher earners may receive a larger monthly check, but in reality, they are replacing a smaller portion of their pre-employment income.
People With Lower Incomes Receive Greater Retirement Benefits
Approximately thirty percent of the income received by the household before their departure from labor is replaced by those who earned 160% of the average pay. On the other hand, those whose salary was 45 percent of the average pay receive benefits that nearly equalize their previous earnings. There is a fairly straightforward explanation for why those with lower incomes receive greater income replacement benefits from Social Security than do those with higher incomes. It has to do with the method by which Social Security calculates the monthly amount of retirement benefits it pays.
Average Indexed Monthly Earnings
Because of the way the formula is set up, lower earnings receive a larger Social Security benefit than they do income. It is forward-thinking. This is how it operates. First, data from thirty-five years when you made the most money is adjusted for inflation to get your average wage. Your Average Indexed Monthly Earnings (AIME) are what we refer to as this. Your standard benefit then corresponds to a portion of AIME. However, the percentage varies based on income. In particular, the benefits will be as follows: 15% of any revenue over the second bend point, 32% of your AIME throughout the first and second bend points, and 90% of your AIME up to the first bend point.
The applicable bend points are those that are in force in the year that you turn sixty-two, or in the year that you pass away or become incapacitated if any of those events occurred before the age of sixty-two. The bend points are $1,174 and $7,078 for 2024. However, they receive annual adjustments for inflation. Rich people will make a significant amount of money over the first bend point and possibly even over the second. Thus, a lesser portion of all that money will be replaced. Lesser earners will replace a higher percentage of their income since they will have all of it below the second bend point and, in some situations, nearly all of it below the first.
Wage Base Limit
Because of this, the Americans with the lowest incomes get to replace almost 50% of their pre-retirement wages, while the top earners receive less than a third. There’s still another thing to think about. The amount of your annual income that is deducted from your benefits and subject to Social Security tax is limited. The pay base limit, as it is known, is set at $168,600 for 2024. Therefore, any income over that threshold is not replaced in retirement or included in the AIME calculation for the individual. Because they aren’t receiving Social Security payments to replace a large portion of their income, even individuals who appear to be receiving higher benefits on paper need to have a large amount of additional savings.