The Mailbag: What's the MOST you can get from Social Security?

Q:  You are forgetting one major point. In these articles, you need to mention that Social Security has a CAP on the maximum benefit it pays!  –JM, via email

 

A: There is indeed a maximum monthly Social Security benefit.

But the amount you get always depends on what you’ve paid into Social Security (which in turn is based on your earnings), on how many years you worked, and on how old you are when you apply for benefits.

The maximum monthly benefit is the result of that combination. It’s not an arbitrarily imposed ‘cap’.

Or to put it another way, the maximum monthly benefit is by definition what the actuarial formula gives you if you paid the maximum Social Security tax throughout a 35 year working life.  

Let’s assume you did that. In other words, each working year of your life, your annual salary was equal to (or more than) the maximum taxable Social Security earnings.  

The maximum taxable Social Security earnings have risen steadily. In 1965, workers paid Social Security tax on the first $4,800 they earned.  In 2010, we pay Social Security on the first $106,800 of annual earnings.

If you retire in 2010 at age 66 -- your full retirement age -- after paying the maximum tax for 35 years, you’ll get the biggest possible Social Security benefit this year: $2,346 a month.

But you’ll get $3,096.72 a month – nearly one third more – if you wait until you’re 70 years old to apply for your benefit. That’s because you get an 8% annual bonus for up to four years of delay after your full retirement age.

If you want more information about the actuarial formula used to calculate Social Security benefits, you'll find it here. If you want to see how the maximum taxable earnings amount has risen over time, check out this table.

The maximum monthly Social Security benefit changes every year. That's partly because the amount you paid in to the system -- one of the key variables in calculating your benefit -- depends on the tax you paid during your working years. And as noted, the maximum taxable amount has changed over time.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.

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