Rich retirees get more Social Security than those who didn’t earn as much throughout their career. And that makes sense since benefits are based on your earnings history.
What may surprise you, though, is the actual difference between the benefits earned by the richest retirees and by typical Americans.
Here’s how much more money the richest retirees get
The average monthly Social Security benefit is around $1,906 for retired workers, while the maximum monthly Social Security benefit is $4,873.
This is a huge gap, with seniors who receive the largest checks getting $2,967 more every single month and $35,604 in extra Social Security income every year. The wealthy retirees getting such a big sum end up with more than double the amount the typical American gets from Social Security each month.
Why isn’t there a bigger gap?
While the gap between what wealthy retirees get and what the typical American gets is a pretty substantial one, you may actually wonder why wealthy people aren’t getting even more money.
After all, benefits are based on average wages and are generally designed to replace about 40% of pre-retirement income. Someone who makes $5 million a year would have a monthly income of around $416,667, so 40% of that amount would mean they should be getting a Social Security check worth around $166,667.
Of course that doesn’t happen, though. And that’s because of something called the wage-base limit. Social Security doesn’t want to pay people hundreds of thousands of dollars each month. So, there’s a cap on how much income people pay Social Security tax on. Any income earned above that amount won’t have Social Security tax taken out of it and isn’t counted in the benefits formula.
The maximum amount someone would be taxed on in 2024 is $168,600, and it’s the inflation-adjusted equivalent of that every year. So, anyone making below this amount is taxed on their entire salary and gets a Social Security benefit based off it. But those making above it will not have all their income counted. Their benefit will be based on a salary of $168,600.
Social Security’s benefits formula takes your highest 35 years of earnings into account then figures out your inflation-adjusted average wage during those 35 years. Your standard benefit is a percentage of these average earnings. And your standard benefit can change depending on the age when you claim benefits, as early filing penalties apply before full retirement age, and delayed retirement credits apply after until age 70.
Under this benefits formula, rich retirees not only don’t get to count all of their income, but they also don’t get as big of a percentage of their average earnings. That’s because the benefits formula gives you a monthly check equal to:
- 90% of average earnings up to a specific income level called a “bend point.”
- 32% of average earnings up to a second bend point.
- 15% of average earnings above that second bend point.
If your average wage is below the first bend point, Social Security benefits will replace 90% of it. But if it’s above the second, you only get a small percentage of that extra money. High earners, therefore, get benefits that replace less of their income in addition to potentially not having all their income included when their benefits are calculated.
All of this means that while wealthy people will see a higher Social Security check, they still do need to save for retirement if they want to maintain their standard of living.
And, whether you’re rich or poor, you’ll need to remember that Social Security alone isn’t designed to be your sole support source. You should have extra funds from investments to get the financial security you deserve as a retiree.