For the longest time, I've wondered whether Social Security is a dependable source of income for traditional retirees. As someone still over 22 years away from being able to collect, it's hard to believe in the system given it is already underfunded by ~22%.
Therefore, when the Social Security Administration announced the cost of living adjustment (COLA) for 2023, I was shocked! Due to rising inflation, there will be a COLA of a whopping 8.7% in 2023, up from a COLA increase of 5.9% in 2022. The increase will translate to an addition of $92 to retirees’ average monthly benefit next year.
Earning the average Social Security benefit of $1,827 a month or $21,924 a year in 2023 until death is not bad. Further, the maximum Social Security benefit increases from $3,345 in 2022 to $4,555 in 2023.
The average person would need about $548,100 in capital returning 4% to generate the average Social Security benefit of $21,924 a year. In other words, we can make the assumption that the average American retiree is a half-millionaire.
As a result, I have no doubt the majority of Financial Samurai readers will be millionaires in retirement as well. We are not only saving aggressively ourselves, we also may very well have health Social Security checks as well!
2025 Social Security Cost Of Living Adjustment
Social Security and Supplemental Security Income (SSI) benefits for more than 72.5 million Americans will increase 2.5 percent in 2025. That's not bad given Social Security COLA adjustments increased by 3.2 percent in 2024, and an impressive 8.7% in 2023 and 5.9% in 2022 due to elevated inflation.
This post will go through the most recent historical Social Security COLA, explain the FICA tax, and share some strategies on how to best earn income to minimize taxes.
In retirement, you want to maximize tax-free income and withdrawals. Social Security should be one of many retirement income sources. If you can move to a state that doesn't tax Social Security benefits, all the better.
2024 Social Security Cost Of Living Adjustment
Social Security and Supplemental Security Income (SSI) benefits for more than 71 million Americans increased by 3.2 percent in 2024.
The 3.2 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 66 million Social Security beneficiaries in January 2024. Increased payments to approximately 7.5 million SSI recipients will begin on December 29, 2023. (Note: some people receive both Social Security and SSI benefits)
Read more about the Social Security Cost-of-Living adjustment for 2024.
The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $168,600. Any dollar earned above $168,600 will not be subject to Social Security tax.
The earnings limit for workers who are younger than “full” retirement age (see Full Retirement Age Chart) will increase to $22,320. (We deduct $1 from benefits for each $2 earned over $22,320.)
The earnings limit for people reaching their “full” retirement age in 2024 will increase to $59,520. (We deduct $1 from benefits for each $3 earned over $59,520 until the month the worker turns “full” retirement age.)
There is no limit on earnings for workers who are “full” retirement age or older for the entire year.
2023 Social Security Cost Of Living Adjustment
For 2023, Social Security benefits will increase by another impressive 8.7% because of a rise in cost of living. The 8.7% Social Security cost of living adjustment is the highest in 40 years.
For those collecting Social Security, congrats! However, for the majority who aren't collecting Social Security yet, this adjustment will further boost inflation.
The average retiree benefit will go up by $146 per month, to $1,827 in 2023 from $1,681 in 2022, according to the Social Security Administration. The average disability benefit will increase by $119 per month, to $1,483 in 2023 from $1,364 in 2022.
What's more, standard Medicare Part B premiums will go down by about 3% next year to $164.90, a $5.20 decrease from 2022. Medicare Part B covers outpatient medical care including doctors' visits.
Finally, the maximum Social Security benefit in 2023 is an impressive $4,555 a month.
Largest Social Security COLA Since 1982
All this time, I had thought Social Security would not pay out its fully promised amount. For it to now pay such a huge cost-of-living adjustment is baffling since larger payments reduce the plan's financial health.
The Social Security Board of Trustees recently said the trust fund that pays benefits is projected to become depleted by 2034, a year earlier than estimated in 2020. At that time, Social Security income would be sufficient to pay about 78% of scheduled benefits.
The 2022 5.9% Social Security cost-of-living adjustment and 2023 8.7% COLA adjustment will be the largest since 1982, according to Social Security Administration data. The adjustment is based on the difference between the CPI-W index’s average for the third quarter of the current year compared with the same period in the previous year.
FICA Tax (Social Security Tax ) Income Threshold
For those of you who still have to pay a Social Security tax (FICA tax), the maximum amount of earning subject to the tax will increase to $147,000 in 2022 from $142,800 in 2021. Curiously, that equates to only a 2.94% increase versus the 5.9% COLA increase.
For 2025, that wage limit where you pay maximum FICA tax is $176,100.
2023 FICA Tax Income Threshold
For 2023, the FICA tax rate for employers is 7.65% — 6.2% for Social Security and 1.45% for Medicare (the same as in 2022). For 2023, an employee will pay: 6.2% Social Security tax on the first $160,200 of wages (6.2% of $160,200 makes the maximum tax $9,932.40), plus. Ouch. There is never a free lunch.
If the government wanted to improve the financial health of Social Security, it would at least raise the maximum taxable income limit by 5.9% and 8.7% as well. Although not a popular move, raising the income tax limit by 10% – 20% to $157,080 – $171,360, while capping maximum benefits, probably would have passed critical eyes.
2024 Social Security Cost Of Living Adjustment
Fortunately or unfortunately, the Social Security cost of living adjustment only increased by 3.2 percent in 2024. This is because the rate of inflation has come down from its mid-2022 high of 9.1%.
The 3.2 percent cost-of-living adjustment (COLA) will begin with benefits payable to more than 66 million Social Security beneficiaries in January 2024. Increased payments to approximately 7.5 million SSI recipients will begin on December 29, 2023. (Note: some people receive both Social Security and SSI benefits)
The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $168,600.
The earnings limit for workers who are younger than “full” retirement age (see Full Retirement Age Chart) will increase to $22,320. (We deduct $1 from benefits for each $2 earned over $22,320.)
The earnings limit for people reaching their “full” retirement age in 2024 will increase to $59,520. (We deduct $1 from benefits for each $3 earned over $59,520 until the month the worker turns “full” retirement age.)
There is no limit on earnings for workers who are “full” retirement age or older for the entire year.
Read more about the COLA, tax, benefit and earning amounts for 2024.
FICA Tax Rate Revisited
FICA stands for Federal Insurance Contributions Act. It consists of a Social Security tax and a Medicare tax that automatically gets deducted from your paycheck.
The Social Security tax rate is 12.4% – 6.2% is withheld from the employer and 6.2% is withheld from the employee.
The Medicare tax rate is 2.9% – 1.45% withheld from the employer and 1.45% withheld from the employee.
Therefore, for regular employees, you will pay 7.65% of your income up to the maximum limit ($147,000) in FICA taxes. Again, for 2023, the maximum income limit goes to $160,200. Let's just use the 2022 as an example.
If you are self-employed, you must pay the full 15.3%, but you can take a deduction for half this amount. Paying the full 15.3% FICA tax is one of the reasons why many small business owners elect to form S-Corps.
The FICA (Federal Insurance Contributions Act) tax has two components: Social Security and Medicare
Social Security:
- Wage Base Limit: The Social Security portion of FICA has a wage base limit. For 2025, this limit is $176,100.
- Tax Rate: The Social Security tax rate is 6.2% for both employers and employees (12.4% total).
- Implication: Earnings up to $176,100 are subject to Social Security tax. Earnings above this limit are not.
Medicare:
- Wage Base Limit: There is no wage base limit for the Medicare tax. All covered wages are subject to Medicare tax.
- Tax Rate: The Medicare tax rate is 1.45% for both employers and employees (2.9% total).
- Additional Medicare Tax: Employees earning over $200,000 annually are also subject to an additional 0.9% Medicare tax.
FICA Tax Example Using An S-Corp To Save
Let's say you have an S-Corp and have gross profits of $147,000. To simplify, your only operating expense is income. If you pay yourself a “reasonable wage” of $47,000 and $100,000 in distributions, you get to save $15,300 in FICA tax ($100K X 15.3%).
Unfortunately or fortunately, there is no maximum income limit on Medicare tax. You'll just have to keep on paying the 1.45% Medicare tax for as high as your income will go.
Further, there is an additional Medicare tax of 0.9% for high-income taxpayers with earned income of more than $200,000 ($250,000 for married couples filing jointly).
Could Retirees Really Do Fine With Social Security?
We know that consumer prices have risen quickly due to trillions of dollars of economic stimulus. Everything from food to new cars, to home prices have skyrocketed in value. However, prices finally began to moderate starting in mid-2022 and should continue heading down in 2023.
If you're a retiree who has a paid-off home, has no need for a new car, eats moderately, and doesn't spend much on clothes, inflation isn't as big of a hit. Yet, with a 8.7% Social Security benefits increase in 2023, a retiree is finally beating inflation.
Personally, I'm simply going to consume less during a supply-shock scenario. I'll get the latest hit toy for my kids next year when it's half off. Or, they'll just have to play with cardboard boxes.
After 40+ years of saving and investing, inflation has done a wonderful job at inflating your stocks, real estate, private investments, and alternative investments. Too bad bear markets hit every 7-10 years as well.
Therefore, providing an additional 5.9% COLA adjustment is icing. To then add another 8.7% Social Security cost of living adjustment for 2023 is amazing. I could totally live off $4,555 a month in Social Security benefits if I had no debt.
It is the person who is still paying FICA tax and still decades away from a traditional retirement age that probably needs more help. Not the absolute richest generation in our earth's history.
Related: When Work No Longer Matters Thanks To Solid Investment Returns
Wealth By Generation Charts
Take a look at the below chart by the Federal Reserve that highlights the percentage of total net worth by generation. The Baby Boomers, those born between 1946 – 1964, are the dominating generation.
Millennials, those born between 1981 – 1996, barely have any wealth. Yet, the government has decided to give Boomers a 5.9% COLA increase despite an already underfunded pension plan? Wow!
Social Security COLA Is Like Giving The Rich More Money
Below is another wealth by generation chart from the Federal Reserve, just constructed differently. Sure, the Millennial cohort is obviously younger than the other two cohorts and should be less wealthy. But there are more Millennials than Boomers now. If the government really wanted to properly redistribute wealth, it would focus more on helping the poorer generations.
Giving a 8.7% COLA increase for 2023 to Baby Boomers is like elite private universities giving full-ride scholarships to Barack Obama's and Donald Trump's kids. Instead, wouldn't it be better for universities to give scholarships to poorer families struggling to get out of the poverty cycle? I think so.
But as we found out from the latest college rankings by Forbes, Harvard's share of Pell students is just 12% versus 25% on average for students enrolled in Forbes' top 600 colleges. In other words, the rich like to take care of their own even though they speak differently in public.
Given the government is run by the rich elites, taking from the poor to give to the richest generation is par for the course. It's called pulling the ladder up from behind you once you've gotten yours.
Don't Rely On Any Social Security For Retirement
Given the government's logic of:
- Raising COLA by 8.7%, but only raising the maximum income subject to FICA tax by 2.94%
- Helping the rich more than the poor
It's only rational for us to continue to not rely on Social Security for retirement. If the government wanted to fix Social Security, it would do the opposite of the two things above. Raising COLA by 8.7% for 2023 lowers our chances of being made whole when it's our time to collect.
Therefore, we need to rely on the new three-legged stool for retirement:
If Social Security is there for us when we're in our late 60s or 70s, fantastic. If not, it doesn't matter because we didn't rely on it to fund our needs in the first place.
Social Security Benefits Continue To Be Very Important For Retirees
The sad truth is, about a quarter of seniors 65 and older rely on Social Security benefits for 90% or more of their income, an AARP analysis of Census Bureau data found. It behooves all of us to NOT end up being in this bucket of people. Social Security is the pension we can all have, but we shouldn't rely on it for most of our expenses.
The more of us who can be financially self-reliant, the more the government can do to help those truly in need. Medical care and prescription drugs will likely continue to go up at a much faster rate of inflation.
However, if the government's logic continues unchanged, we, the self-reliant, might actually be the biggest beneficiaries of the government's decisions in our golden years. How ironic is that?
If in doubt, retire rich. Not only will you be able to take care of yourself, the government may give you more money too. The Social Security Cost of Living Adjustment will go down in 2024 given inflation peaked at 9.1% in mid-2022 and is now below 3.5%.
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My friends mother is 67, retired and living on Social Security. As soon as they announced the COLA increase, HPD raised her rent accordingly and EBT lowered her food stamps due to the increase thus completely ignoring the skyrocketing cost of food. So what she got from one Government hand, the other took away. And to top it all off, they started taking more for her Medicare insurance. So I do not see how she benefited from this huge COLA increase since all of it is being directed into the pockets of the rich. She is no better off than before the increase and in fact is getting worse. Time to start taxing these rich trillion dollar corporations who’s profits have more than doubled during the pandemic instead of the IRS trying to see who put $600 in the bank over the year and telling drug dealers and criminals that they must declare their illegal profits and stolen merchandise value on their tax forms.
Btw, there are reforms that have been proposed in order to keep Social Security solvent. In fact, there are many options and these have been built into policy simulation models that anyone can use (“play with”) to understand the impact of one or more of these options.
Two of the models can be found here: https://www.crfb.org/socialsecurityreformer/
And, here: https://budgetmodel.wharton.upenn.edu/issues/2018/8/8/penn-wharton-budget-models-social-security-simulator
FS – Your comments indicates a leftist POV. This program, like many other government sponsored plans for us, represents nothing more than one more attempt to control our families and exhibits the usual leftist view that our money is not ours but something “they” allow us to keep.
Social Security is one of the worst programs ever devised. What you get depends on the government. What you pay is demanded by the government.
As a former investment guy, I challenge you to explain why Social Security is a better idea than just allowing people to do as they want with their money, or better yet, having their and the employer’s funds invested in an S&P 500 fund not controlled by the trolls in DC.
Can you explain more what you think my point of view is? I don’t quite understand how you think you I think. Please see: The New Three-Legged Stool For Retirement: Don’t Depend On The Government
At the same time, I think if people are left 100% to their own devices, millions would fall into poverty in retirement. So something is better than nothing.
What is your background?
You should review the history of Social Security from it’s origination in 1935 to the present and you would realize who benefited from the Social Security System. Also review the life of the average elderly worker in this country prior to Social Security. Keep in mind now part-time, self-employed and some employers do not have a 401k or pension plan for their employees.
I think 5.9% is okay. Even if inflation comes down to 2% in a few years, the price already went up. Prices aren’t going to come back down. Retirees on a fixed income need the COLA increase to maintain their lifestyle.
Anyway, Social Security Benefits help the poorer people most. The benefits are a bigger percentage of their income. So it helps poor people more.
Good point about side hustles, though. It’s nice to keep busy and earn some income even after retirement.
Hey Sam, I want to ask your opinion about a social security opt-out.
While I work in biotech, my background is growing up in the rural midwest. My family did a lot of business with amish and mennonites, who I later learned when I got my first jobs don’t pay into or draw from social security on reglious/cultural grounds.
While I realize we have a duty to take care of our elders, articles like yours perfectly express my skepticism that we can keep this going forever.
Do you think it would make sense to expand the option to opt-out to the broader public, rather than just religious sects?
I wouldn’t worry about SS not being around. It will only go away if voters let it. The government never worries about money when wanting a war. 800 billion was spent on defense last year alone. Not to mention the bank bailouts a decade ago. But whenever it comes to paying back people for a system we paid into for 40 years they claim they are broke lol.
It’s like my city using firefighters and schools to justify tax increases rather than reducing wasteful programs. They are just testing us to see how much they can get away with.
Love the article and comments. Though the complete disparagement of government as if we have no control is ludicrous. Truth is, government is doing what is being asked of it – funneling as much money to the Boomers as possible.
Further, the idea that “I paid into it so I deserve my share” misses the entire point of SS. You pay into it so that your parents can retire with a small safety net. What we have done is create a much larger safety net than Boomers need at expense of Gen X (the really screwed generation as Millenials will soon enough gain power).
Of course, the idea of generations is arbitrary, but useful for discussion. Either inflation or a benefits cut will keep SS “solvent” so I do not see a reason to ask for voluntary cuts from Gen X (Millenials will take care of themselves at expense of both past and future generations.)
But, at end of day, having the multiple streams of income FS mentioned leads me to believe I will be ok and that world will not be devoured by the Inflation Kraken (a completely separate post) even though it is wise to listen to Adam Smith – even if he was know. To talk to himself.
The “Inflation Kraken” is not that terrifying when you know how it work …
Average home price in the USA (+1482%, not including maintenance costs)
In 1970 : $17 000
In 2021 : $ 269 000
S&P500 (+5304%, not including dividends)
In 1970 : 83
In 2021 : 4486
Gold (+4957%, not including storage and insurance fees)
In 1970 : $35
In 2021 : $1770
Bondholders were paid interests ranging from 3% to 20% during that time.
Now, extrapolate that 30 years going forward. The actual bond yield is fixed 2%.
Who do you think will come up losing money ?
Not that scary. But for millions of people who don’t understand this, they will end up losing money. Just make sure you are not part of this group.
If you already invest in real estate, stocks and/or gold, you already master the “Inflation Kraken” without even knowing it … ;)
A 5.9% COLA is silly for a system already substantially underfunded. No one in government will take the initiative to resolve this for the long term.
If anyone did people would ruin their lives. Tiktok titter instaspam and other social media services would blow anyone up trying to solve what is clearly a problem.
But it’s all okay, we can just do another stimulus bill for another 3,000,000,000,000. We just need enough ink for the paper.
Sillyness!
Hi Sam …
How is a 5.9% COLA increase in Soc. Sec. benefits for ’22 a negative? When the reality is 1.3% increase for ’21 and f/actual inflation is much higher than the manipulated, contrived % used by our Govt. agencies?
Taking from the poor, giving to the rich does not make sense (to me). Sense would include an actual, factual calculation of inflation being used to establish COLA and applied to Soc. Sec. benefits. And consideration given to proportionate reductions in benefits based upon a recipient’s income; as controversial as that may be, it would make some sense if the ‘System” continues to be allowed to be “underfunded”. Which is solely the choice continuing to be made by our elected representatives. Which is no different than their controlling choice with regards to medical care and pharmaceutical prices that cause the greatest burden and impact lower income households.
Lower and middle income retirees on fixed incomes should/need be concerned about inflation.
Thanks .. Dennis
With interest rates to low we depend on social security to survive.
But how have your investments done over the past 40+ years? Surely they have compounded with the market as well?
25yo, 100k income, retirement 65yo
if one took 12.4% of your income and invested at at a 7.5% rate, you would be nearing 3 million
now tell me how great ss.
The above scenario is also skewed as wage increases over 40 years would lead to even higher numbers
Finally, one can NOT pass on ss to your children while one can if the assets were privatized
the gov is dysfunctional, that is why no one gets upset anymore, just the way it is
show me a 25yo who earns 100K and invests 12.4% of it for 40years? maybe only those Obama/trump kids…
The 12.4% is ss tax…
It would be automatic and privatized
Anyone in IT, healthcare, finance make 100k at 25yo. Heck, even electricians and plumbers do nowadays.
Sam, you wrote a nice piece some years back on this subject, and anyone who is sincerely curious about Social Security would do well to read it. https://www.financialsamurai.com/social-security-will-make-us-all-millionaires-in-retirement/ And the book, “Get What’s Yours” by Laurence Kotlikoff.
Happy to see the CPI-W acknowledged, too few people understand that the 5.9% is based on Wage inflation while the FICA increase of 2.94% is based on goods-and-services inflation. My own thought is the destruction of the U.S. dollar value is intentional, and there will be no ‘recovery’ for the idea of matching tax revenue with government spending. Protect yourself.
“A revolution is an insurrection, an act of violence by which one class overthrows another.” – Mao Zedong
“I wrote ‘Rules for Radicals’ to show how the ‘have-nots’ can take from the ‘haves.’ – Saul Alinsky
I’m not surprised SS was increased 5.9% for 2022. In fact, I was already expecting that situation by mid-2020 when they announced all the stimulus programs. For 2023, I expect the increase to be even more than 5.9%.
To understand what is happening, you have to realize we are inside a currency debasement. My expectation is for a total currency devaluation of around 20-30% over a five year period (2019-2024), although it is impossible to predict the exact number. Inflation, being the inverse relation of a currency debasement, means a 20-30% inflation over a 5 year period.
All the increases we had in 2021 (SS, wages, rents, business profits, increase in value of houses and porfolio, etc.), means that the disposable income will be higher in 2022. Since these are all nominal gains – and not real economic gains generated by increased productivity – there will be even more money circulating in 2022, and this money will be chasing approximately the same amount of goods there was in 2019. The natural result of this is even higher inflation in 2022, which will lead to even higher COLA for 2023, etc, etc.
This is the spiral of inflation starting to take traction.
My only question is : can they really stop this inflation at 20-30% over 5 years ? What will they do if inflation reach levels higher than 10% ?
Back in the good old days, when currencies were backed by specific amounts of precious metals (eg. gold and/or silver), currency debasement were deliberate actions by governments with a specific $ value and % of inflation.
But in a FIAT currency system, the value of a currency is based on the confidence of bondholders (lenders to the government). In the event bondholders lose confidence in the government for controlling future inflation, we could see a total collapse of the US dollar. This is unchartered territory, so nobody know exactly what will happen…
In his book “Wealth of Nations”, Adam Smith explained very well how currency debasements works. Note that they are always political in nature, and not a result of the economy itself.
https://www.gutenberg.org/files/3300/3300-h/3300-h.htm#chap38
So, for your questions “Who will pay for SS ? Is it millenials ? Will SS default ?”, my answer would be : “Probably the bondholders will pay for this. They will end up holding worthless US dollars and won’t be able to buy anything with the face value of their bonds.”
Adam Smith – Wealth of Nations (Chapter 38) – Extract :
“When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, though frequently by a pretended payment.
The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment. […]
A pretended payment of this kind, therefore, instead of alleviating, aggravates, in most cases, the loss of the creditors of the public; and, without any advantage to the public, extends the calamity to a great number of other innocent people. It occasions a general and most pernicious subversion of the fortunes of private people; enriching, in most cases, the idle and profuse debtor, at the expense of the industrious and frugal creditor; and transporting a great part of the national capital from the hands which were likely to increase and improve it, to those who are likely to dissipate and destroy it. When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy, is always the measure which is both least dishonourable to the debtor, and least hurtful to the creditor. The honour of a state is surely very poorly provided for, when, in order to cover the disgrace of a real bankruptcy, it has recourse to a juggling trick of this kind, so easily seen through, and at the same time so extremely pernicious.”
Maybe the best post I’ve ever seen on a PF site. Thank you. Especially appreciate your use of ‘pernicious’, as we watch the Treasury looted, MMT discussed as if it were a serious solution, discover politicians doing insider trading and learn that it ‘is not illegal’, and government jobs paying $72,000/yr plus benefits to literally scrape up human feces.
Thanks ! But not my words. These are the words used by Adam Smith. 250 years ago.
I think you have a lot of great information on your site about investments, Sam, but I feel like maybe you don’t have as good a grasp on government topics. I worry that sounds harsh, but I am not trying to be mean.
There is no flexibility in the COLA amount. You make it sound like someone had discretion to reduce the percentage, but the law ties it to the inflation rate. It is also based on the previous year’s inflation and not meant to be a prediction of next year’s inflation.
You might be correct, we seem to be stuck doing the same things as always and humans don’t have any discretion to do much of anything wrt the government, even though we are the government. Nothing will change, until we’re right at the edge.
As a result, we need to focus on the new three-legged stool in retirement and not depend on Social Security.
If you are an expert in Social Security, I welcome a guest post from you to explain why my logic doesn’t make sense and what solutions you have.
I don’t mind receiving a massive cost of living adjustment if I become very wealthy in my 60s and 70s. But I worry about other people who might need the money more with an underfunded system.
But it doesn’t seem like people really care, so long as they get theirs.
Are you getting yours?
Mary,
From the article,
“ This 5.9% cost-of-living adjust will be the largest since 1982, according to Social Security Administration data. The adjustment is based on the difference between the CPI-W index’s average for the third quarter of the current year compared with the same period in the previous year.”
I’m pretty sure Sam knows what he is talking about and how COLA is measure. Did you just miss it?
Also, are you really of the belief that no rules/laws can change? If so, you have a defeatist attitude and are leaving a lot of wealth and potential on the table.
Thanks Andy,
I did miss that. I appreciate your pointing it out, and I stand corrected there.
I think I was mainly stuck on comments like this:
“For it to now pay such a huge cost-of-living adjustment is baffling since larger payments reduce the plan’s financial health.”
It gives the impression that that someone simply decided to give a 5.9% increase when they could have chosen a lower amount.
Certainly, Congress could have amended the law to change the percentage this year, but it is naive to think Congress could ever be so nimble. I worked in a legislative office for more than a decade and can’t imagine any change to major legislation like the Social Security Act being done in weeks or even months.
Sam, while I feel very well-versed in Social Security, I am not interested in writing a counterpoint to your logic because I think Social Security does need an overhaul to remain solvent for future generations. My comment was mainly in response to the framing of the article as implying that the government could have very easily chosen to lower the COLA for next year.
The reality is that the US government is already insolvent, considering all the debt and all the pledges they have made for future benefits. This include SS. All the laws are already in place to make sure governments are going right into bankruptcy.
There is no way out of this.
https://www.usdebtclock.org/
This is the difference between a growth mindset and a fixed mindset.
With a fixed mindset, you don’t believe anything can change, so you end up in a static state.
Change your mindset.
Sam you have started / generated a much needed discussion. Of course current rules dictate the 5.9% raise, but who is minding the store when increased deductions don’t come close to meeting the requirements of the higher payouts. The answer is no one gives a crap. You would think the talking heads on TV would be discussing topics just like this and urging Congress to act. Cutting benefits will raise holy hell but screwing the working man by increasing the rate and amount of SS deductions would only raise brief unrest. I followed your advice and retired 3 years ago at age 61. Smartest move I ever made. I was busting my ass for 225k and with my wife’s income paying all the extra taxes. Now I watch my portfolio grow and collect 3 checks from Uncle Sugar every month (military ret, VA disability and Social Security). It amazes me to see similarly situated people soldiering on.
So readers don’t think I’m a total A hole, I use my time to take care of my 90 year old uncle, volunteer as an AARP tax aide and Mountain Host at my home ski area.
Your advice and clarity of thinking needs to be more widely disseminated. Rock on!
My wife and I could easily live on the Social Security payments we will get at age 70. They are projected to total $67,560 a year and not all of that is taxable. Plus that is in today’s dollars not in 2025 dollars when we will start drawing it. We will spend more than that because we have several million dollars invested in addition to draw from but the fact is we would not have to cut anything very meaningful from our lives to get by on nearly $70K a year since we have no mortgage, live in a LCOL area and no debt nor dependents that we fund. I was shocked when I first saw how much we would receive because I had always seen people write about the average benefit. Ours is high because every one of the years I worked at my 9 to 5 I earned above the cutoff point for Social Security tax and I did that for the entire 35 year period that Social Security considers in their payment algorithm. I’m comfortable that I’ll get 100% of what is projected because Congress will never act until they are forced and they typically will only attack the benefits or extend the claiming age for younger people rather than claw back benefits that are already flowing. They might tax 100% of it instead of the 85% max that is taxable now, but that’s small change. I do worry that my kids will not get the same relative benefit I will and that they’ll pay far more into the system for even poorer rewards. And, like you if it did go bust its money I don’t need. Having the equivalent of another $1.7 million (using the 4% rule) feels pretty nice just the same.
Got to love $67,560 a year in SS benefits! Curious whether you would be OK if the government cut it by 10% to help shore up the system?
As a multi millionaire, and so many other multi millionaires excepting Social Security, I do wonder if you guys mind benefit reductions. I don’t think I would because I never counted on it in the first place.
In 22 years, my wife and I might receive over $100,000 a year and Social Security benefits. That’s pretty damn good.
I would definitely mind. Both my employer and I were already forced to pay into a system that has a terrible ROI for high earners. If they ratio down everyone by the same percentage because the trust fund is gone and they have no other funding source I will have to be OK with it because that is built into the existing legislation. But if they put the burden of solving the problem disproportionately on the backs of the people who already are getting the worst return on what they paid in, that’s just not OK with me. However, I don’t think my being not OK is going to swing much weight with the government. And anyway, like you, I’ll be fine. Its just that after already paying much more in taxes than most Americans have it would be nice to get some of it back.
This article contains really poor reasoning. Sam suggests that Boomers having more than Millennials is bad, as though a young person should have as much net worth as an old person. What about time value of money? Compound interest? Heck, just the fact that old people are retired and depleting their wealth while young people are building it up?
We also see “percentage of wealth” owned by each generation rather than actual numbers, which obscures the fact that total wealth (even per capita) has increased over time.
Social Security is MASSIVELY progressive. If I contribute four times as much to the program over the years as you do, I can expect my benefits to be maybe 30% more than yours. It is also a terrible ROI, and that fact is obscured for most people by the fact that payroll taxes are deceptively collected (half of them show up on your paystub; the other half on your employer’s expense report). Those are things worth talking about, but this article makes it seem as if the problems skew the other way. They don’t.
Finally, while it’s true that retirees don’t have a lot of big-ticket expenses anymore, it’s also true that those inflating costs have been excluded from inflation indexes for a while. Politicians decide how inflation is calculated, and they always have incentive to understate it. Real cost of living is up plenty more than 5.9%. The COLA increase isn’t Social Security’s problem; a fantastically irresponsible government that ignores the laws of economics is.
As someone who will retire rich, I want as much Social Security benefits as possible before it goes bust for the subsequent generations.
I paid my share and I want all of it and then some!
I’m with you JD. Even though we’re rich and richer than younger generations, we deserve it because we worked and saved for it.
Can you explain how SS is progressive? You get what you put into it.
Oscar, the first $900 subject to SS tax is credited at an 80something % rate. The next approximately $4K is credited at 32%, and anything above that is credited at 15%.
I didn’t want my post to get bogged down in the explanation, and then you went and wrote it up in barely 30 words. Well done, although we should clarify that it’s $900/$4k per month.
I am in my 30s and earn more than enough to contribute the annual maximum to the program. According to the government’s calculator, the amount I will get in retirement if I never contribute another penny is already 2/3 of the amount I will get if I continue contributing the maximum for another 30 years. The ROI on my next 30 years of work is going to be tiny!
Thanks. The numbers were estimated (I know they change every year along with the maximum amount subject to SS tax) as I was too lazy to google the actual exact dollar amounts.
Also, wanted to add that my first years of employment were low wage (factory and military), so unlike you, later years of good wages did a lot for my anticipated SS payment.
I didn’t anticipate your reaction and similar reactions so this is great.
I thought there would be more of an uproar for multi millionaires collecting large Social Security benefits even when they don’t need it. It’s kind of like multi millionaires getting healthcare subsidies, when I don’t think that was the governments intent.
Therefore, I think maybe there is a change in perception or more of an acceptance for very wealthy people.
Perhaps stealth wealth is no longer as necessary. How interesting is it that you could retire with $30 million net worth and collect $100,000 a year in Social Security benefits in 20 years.
Change is afoot!
We’ll said JD. Completely agree. Also would think the formula is self correcting. If the inflation spike is a short term event caused by supply disruptions, then you could future prices drop, which should lead to a negative Cola adjustment.
Oh wow I’m surprised they raised it so much. Maybe covid was another reason. I’m not surprised they raised the income cap simultaneously but that is interesting how they didn’t raise it at the same percentage. Good catch – you notice everything Sam!
Even though I’ve been paying into SS for so many years I too do not expect it to be around when I get into my 60s and 70s and have thus made my own independent retirement savings plans.
Great post Sam! One of the most entertaining and sobering summaries of Social Security can be found below. You probably don’t have the time to read it, but it may be fun for your readers.
soundmindinvesting.com/articles/view/the-outrageous-truth-about-social-security1
Funding SS is easy to fix if you subscribe to the ideas of MMT.
At first I liked it, since my wife is on disability and collects SSDI. Then when I realized the maximum income is going up, which comes from me, I wasn’t so happy.
Hah! At least you’re hedged. And given your wife is collecting, you’re closer to collecting than Gen X, Millennials, and Gen Z, who potentially could get 20% – 50% less than promised. Nice.