Q & A
Is there really a maximum Social Security benefit? That can’t be right!
Complete Question: I made a very good living all my life and expect to retire in a few years. I just assumed that since I paid a percentage of my salary in Social Security taxes, that it would be enough money for me to live off of when it came time for me to retire. Now I hear that there’s a maximum benefit. Is that true?
Answer: Yes, this is true. As you may know, your salary is taxed at a rate of 6.2% to pay for Social Security (NOTE: this does not include Medicare). In 2014, the maximum benefit a person can receive at full retirement age (FRA) is $2,642/month. This means that the maximum benefit in 2014 for a 62-year-old is $1,992/month and for a 70-year-old the maximum benefit in 2014 is $3,425/month. This may seem frustrating; however, there is a good reason for it. The Social Security Administration (SSA) has also set maximum contribution amounts every year since 1937. For example, in 1937, only $3,000 of your salary was taxed; in 1985, only $39,600 of your annual salary could be taxed; and in 2014 a maximum salary of $117,000 can be taxed for Social Security. The SSA increases the maximum salary that is taxable every year for inflation (the 2015 maximum is slightly higher at $118,500); however, this also increases the maximum benefit every year.
There are some cases where people are taxed over the salary limit for Social Security. If you have more than one job and your total annual salary is over the maximum, you will likely over pay. This is because all your employers will withhold Social Security tax regardless of what another employer is doing and what your total salary is. The good news is that when you file your annual tax return, you will receive a refund for this overpayment.
So just remember, regardless of how much money you make now, you will still have to consider a maximum Social Security benefit in the future.