SS wage cap increases - how does that affect benefits?

[mistymoney]

I've been chasing to get past that wage cap but they always raise it out of my reach!


trying to console myself that I am getting more "credit" for that? but is that true?

So in 2018, the cap was 128.xxx and I made 128k, I got a few raises since then, now making 137, but the wage cap is up to 142.

so - I'm paying into ss on an additional 9k. Do I get a small increase in my benefits for that? or nothing?

[fell-like-rain]

Yeah, you'll get a little more in benefits. The SSA uses your AIME (average indexed monthly earnings)- basically, take your 35 highest-earning years, sum up all earnings for those years up to the cap, and then divide by 35*12.

So if you retired next year, this extra $9,000 would add $21.42 to your AIME. But that doesn't mean your benefits will be increased by that amount, because they taper it off quite a bit. You get 90% of the first $900 or so of AIME, then 32% of the next several thousand, then 15% thereafter. So it'll either be $6.85 or $3.21 additional per month, depending on how much you've earned so far in life.

[mistymoney]

thanks! $3 is better than nothing!

[pound_foolish]

<snip>

So if you retired next year, this extra $9,000 would add $21.42 to your AIME. But that doesn't mean your benefits will be increased by that amount, because they taper it off quite a bit. You get 90% of the first $900 or so of AIME, then 32% of the next several thousand, then 15% thereafter. So it'll either be $6.85 or $3.21 additional per month, depending on how much you've earned so far in life.

Do you know where I can find the official word on these calculations? I'm having a hard time figuring out my real numbers; I get different values from MDM's spreadsheet, Personal Capital, and ssa.gov. I'm sure they mainly differ in how they project my future earnings, which is exactly why I'd like to calculate it myself (or rather, make sure I understand and agree with the spreadsheet).

[simonsez]

<snip>

So if you retired next year, this extra $9,000 would add $21.42 to your AIME. But that doesn't mean your benefits will be increased by that amount, because they taper it off quite a bit. You get 90% of the first $900 or so of AIME, then 32% of the next several thousand, then 15% thereafter. So it'll either be $6.85 or $3.21 additional per month, depending on how much you've earned so far in life.

Do you know where I can find the official word on these calculations? I'm having a hard time figuring out my real numbers; I get different values from MDM's spreadsheet, Personal Capital, and ssa.gov. I'm sure they mainly differ in how they project my future earnings, which is exactly why I'd like to calculate it myself (or rather, make sure I understand and agree with the spreadsheet).

Yep, SS wages are indexed to inflation and whenever you decide to take SS, then calculation is made at that point looking at those prior earnings in retrospect (more or less).  There is the inflation multiplier for each year (by dividing wage indices), which is easy to do when looking back.  For looking ahead, it's guesswork.  I like calculating future earnings in nominal terms on purpose as it gives me a "worst case" of sorts since inflation is > 0.  I.e. My actual payout will be higher so for planning purposes I like thinking of what I calculate as "the least amount" that I'll receive assuming no reduction in benefits which is a different can of worms.  Every other spreadsheet, calculator, etc. may have different assumptions for the future inflation as well as future earnings (e.g. a 3% raise each year?) and how to calculate them.

https://www.ssa.gov/oact/cola/AWI.html
https://www.ssa.gov/OACT/COLA/Benefits.html
https://www.ssa.gov/OACT/COLA/piaformula.html

[yachi]

Yep, SS wages are indexed to inflation and whenever you decide to take SS, then calculation is made at that point looking at those prior earnings in retrospect (more or less).  There is the inflation multiplier for each year (by dividing wage indices), which is easy to do when looking back.  For looking ahead, it's guesswork.  I like calculating future earnings in nominal terms on purpose as it gives me a "worst case" of sorts since inflation is > 0.  I.e. My actual payout will be higher so for planning purposes I like thinking of what I calculate as "the least amount" that I'll receive assuming no reduction in benefits which is a different can of worms.  Every other spreadsheet, calculator, etc. may have different assumptions for the future inflation as well as future earnings (e.g. a 3% raise each year?) and how to calculate them.

https://www.ssa.gov/oact/cola/AWI.html
https://www.ssa.gov/OACT/COLA/Benefits.html
https://www.ssa.gov/OACT/COLA/piaformula.html

What would be the purpose of guessing future inflation adjustments on your social security earnings?  It should match the inflation you subject your spending to, making the entire exercise useless.

You can assume you'll never have a raise that's higher then inflation going forward - that would result in a factor of safety on the calculation if indeed you are seeing raises higher than inflation.  But thinking of inflation between now and when you collect social security as some sort of positive is not helpful.  To illustrate, say you project your social security payout will cover your grocery bill.  Why should inflation adjustments to your social security payout mean it can cover more than your grocery bill?

[simonsez]

Yep, SS wages are indexed to inflation and whenever you decide to take SS, then calculation is made at that point looking at those prior earnings in retrospect (more or less).  There is the inflation multiplier for each year (by dividing wage indices), which is easy to do when looking back.  For looking ahead, it's guesswork.  I like calculating future earnings in nominal terms on purpose as it gives me a "worst case" of sorts since inflation is > 0.  I.e. My actual payout will be higher so for planning purposes I like thinking of what I calculate as "the least amount" that I'll receive assuming no reduction in benefits which is a different can of worms.  Every other spreadsheet, calculator, etc. may have different assumptions for the future inflation as well as future earnings (e.g. a 3% raise each year?) and how to calculate them.

https://www.ssa.gov/oact/cola/AWI.html
https://www.ssa.gov/OACT/COLA/Benefits.html
https://www.ssa.gov/OACT/COLA/piaformula.html

What would be the purpose of guessing future inflation adjustments on your social security earnings?  It should match the inflation you subject your spending to, making the entire exercise useless.

You can assume you'll never have a raise that's higher then inflation going forward - that would result in a factor of safety on the calculation if indeed you are seeing raises higher than inflation.  But thinking of inflation between now and when you collect social security as some sort of positive is not helpful.  To illustrate, say you project your social security payout will cover your grocery bill.  Why should inflation adjustments to your social security payout mean it can cover more than your grocery bill?

I don't really follow what you're saying as I personally do not guess future inflation adjustments at all when estimating SS.  I'm not assuming anything about personal wage increases in comparison to inflation nor do I ever think of SS payout in terms of what it can cover in retirement.  I simply like to calculate a nominal version for my own ballpark planning purposes knowing that the number it spews out sets a floor. The plan is to not be dependent on SS much at all so the numbers don't have much meaning either way. I am aware I do not calculate SS the same way the SSA does or will when I start receiving checks in retirement.  YMMV 

A poster wondered why SS calculations might spew out different numbers.  I was just saying for someone who wants to get into the nuts and bolts of the SS formulas, the future wage indices are impossible to predict (thus, different assumptions can lead to different numbers even when using the same foundational SS formulas) but the historical ones are easy to use when looking backwards from the current point in time.  If you are near SS collecting age and the exact calculations matter, the estimates will only become more and more precise.

[pound_foolish]

Yep, SS wages are indexed to inflation and whenever you decide to take SS, then calculation is made at that point looking at those prior earnings in retrospect (more or less).  There is the inflation multiplier for each year (by dividing wage indices), which is easy to do when looking back.  For looking ahead, it's guesswork.  I like calculating future earnings in nominal terms on purpose as it gives me a "worst case" of sorts since inflation is > 0.  I.e. My actual payout will be higher so for planning purposes I like thinking of what I calculate as "the least amount" that I'll receive assuming no reduction in benefits which is a different can of worms.  Every other spreadsheet, calculator, etc. may have different assumptions for the future inflation as well as future earnings (e.g. a 3% raise each year?) and how to calculate them.

https://www.ssa.gov/oact/cola/AWI.html
https://www.ssa.gov/OACT/COLA/Benefits.html
https://www.ssa.gov/OACT/COLA/piaformula.html

Thanks! I had no idea it was so complex. I expected income-tax-for-federal-and-two-states complex, which I can (by now) easily handle. But this is a whole new level! Having said that, it seems like assuming that everything stays the same (no inflation, no change in average wage index, etc) would provide a reasonable lower bound for projections.

[yachi]

Yep, SS wages are indexed to inflation and whenever you decide to take SS, then calculation is made at that point looking at those prior earnings in retrospect (more or less).  There is the inflation multiplier for each year (by dividing wage indices), which is easy to do when looking back.  For looking ahead, it's guesswork.  I like calculating future earnings in nominal terms on purpose as it gives me a "worst case" of sorts since inflation is > 0.  I.e. My actual payout will be higher so for planning purposes I like thinking of what I calculate as "the least amount" that I'll receive assuming no reduction in benefits which is a different can of worms.  Every other spreadsheet, calculator, etc. may have different assumptions for the future inflation as well as future earnings (e.g. a 3% raise each year?) and how to calculate them.

https://www.ssa.gov/oact/cola/AWI.html
https://www.ssa.gov/OACT/COLA/Benefits.html
https://www.ssa.gov/OACT/COLA/piaformula.html

Thanks! I had no idea it was so complex. I expected income-tax-for-federal-and-two-states complex, which I can (by now) easily handle. But this is a whole new level! Having said that, it seems like assuming that everything stays the same (no inflation, no change in average wage index, etc) would provide a reasonable lower bound for projections.

It is a reasonable projection.  The wage index is also a way of calculating inflation, so if your actual payout at retirement age is higher when accounting for the average wage index, chances are your money will be worth less by an equal amount. 

When we assume everything stays the same we are implicitly assuming the gains from the wage index matches inflation, and this is a good assumption.  That's why I hesitate to call it a floor.

[simonsez]

Yep, SS wages are indexed to inflation and whenever you decide to take SS, then calculation is made at that point looking at those prior earnings in retrospect (more or less).  There is the inflation multiplier for each year (by dividing wage indices), which is easy to do when looking back.  For looking ahead, it's guesswork.  I like calculating future earnings in nominal terms on purpose as it gives me a "worst case" of sorts since inflation is > 0.  I.e. My actual payout will be higher so for planning purposes I like thinking of what I calculate as "the least amount" that I'll receive assuming no reduction in benefits which is a different can of worms.  Every other spreadsheet, calculator, etc. may have different assumptions for the future inflation as well as future earnings (e.g. a 3% raise each year?) and how to calculate them.

https://www.ssa.gov/oact/cola/AWI.html
https://www.ssa.gov/OACT/COLA/Benefits.html
https://www.ssa.gov/OACT/COLA/piaformula.html

Thanks! I had no idea it was so complex. I expected income-tax-for-federal-and-two-states complex, which I can (by now) easily handle. But this is a whole new level! Having said that, it seems like assuming that everything stays the same (no inflation, no change in average wage index, etc) would provide a reasonable lower bound for projections.

It is a reasonable projection.  The wage index is also a way of calculating inflation, so if your actual payout at retirement age is higher when accounting for the average wage index, chances are your money will be worth less by an equal amount. 

When we assume everything stays the same we are implicitly assuming the gains from the wage index matches inflation, and this is a good assumption.  That's why I hesitate to call it a floor.

When looking at or estimating future earnings, I agree with you.  But looking at a person's wage history in nominal terms surely does underestimate what the actual SS benefit would be, no?

For example: I'm 35 and have 20 years of SS wages that I've paid FICA tax on.  My SS FRA is 67.  If I think of everything right now in terms of 2021 dollars, I agree that whatever SS wages I have from ages 36 to 67 I don't need to worry about assuming what my avg wage increase will be nor worry about what the future wage indices will be since as you point out, these roughly will cancel each other out and I can just think in terms of 2021 dollars.  What I'm talking about are my wages that are already behind me - I treat those as nominal even though the SSA would be multiplying by a ratioed factor greater than 1 to transform them into 2021 dollars, thus underestimating my actual benefit (again, assuming no program cuts or major changes).

If someone is in their first year of earning wages that they pay FICA tax on - yes, it's silly to think of the nominal earnings as a floor when estimating SS benefits as it could equally be called the ceiling as the real=nominal in year 1.  But as a person gets deeper into their HI-35 and closer to FRA, all of those old earnings in nominal terms from the year in which they were earned are underestimating the benefit payout.  I'm not trying to convince anyone to record this way, it's just how I like to think about it when updating my projections each year - in fact, I encourage people to use the tools and estimators that do all of the inflation-adjusted work for you and if people haven't already, to sign up on the SSA website to confirm their earnings history, understand the projections and assumptions for benefits, and ingest all the free information there.

As to the OP, yes wage cap increases will slowly bump up your benefits if you're earning right at the new higher cutoffs but these are pretty much all dollars at the 15% bend point.  So yes, your benefits are rising (outputs going up) but the FICA taxes are really going up (inputs really going up).  You're not coming out behind per se, just not getting as big of a bang for your SS buck as those with lower incomes.  It's a nice problem to have!