Way too much about Social Security

Someone on one of the FIRE subreddits said something about Social Security bend points and I was like “what in the hell are those?” and it felt like something important I might be missing so I put it on my todo list for a month and then finally got around to looking at it yesterday. You don’t need to know any of the following; you can model all the outcomes by logging onto the SSA website and using their calculator. But if you are, like me, the kind of person who has to see how the pieces fit together in order to understand the whole then maybe you’ll get something out of it. Here’s a speed run through the SS topics that interested me, some notes on how they apply to FIRE, and maybe some light commentary on the ugliness of policy making.

Earnings and taxes

Everyone earning w-2 income gets taxed 12.4% but only on the first X dollars of income where X is a number that SS calls maximum taxable earnings and is adjusted every year. In 2025 it’s $176,100. Once you hit the cap you don’t owe any more SS taxes and can receive a refund for any overpayment when you file your taxes (Schedule 3 line 11).

Folks who have an employer only pay 6.2%, the other half is paid by their employer. If you employ yourself you pay all 12.4%. This is the second instance in two consecutive blog posts in which the self-employed get screwed (acknowledging that the self-employed do get to deduct the employer portion, still tho). One can guess that the policy was made this way so that the number most Americans pay attention to is 6.2 and not 12.4. I am not smart or motivated enough to read through the economic literature but skimming through there appears to be vigorous debate on how much of the full 12.4% ends up getting paid by the employees anyway due to impacts on wages and the labor market. As an engineer I hate that this political consideration makes the policy and the resulting world much more complicated than it has to be. On the other hand maybe it wouldn’t have gotten passed at all if everyone was looking at 12.4% rather than 6.2%. Shrug emoji

Benefit calculation

First let’s talk about how benefits are calculated if you claim the benefits at full retirement age (currently 67). SSA calls this the Primary Insurance Amount (PIA).

The SSA keeps a record of how much SS taxes you pay in each year. You can find it on their website. To calculate your benefits they sort the years by amount paid, take the top 35 and take the average. Then they divide that number by 12. This is your Average Indexed Monthly Earnings (AIME).

The amount you receive each month is then calculated using the very bend points that began this whole deep dive. The intent is that once your AIME is high enough, each additional dollar earns you progressively less in SS benefits. These are like income tax bands in that the progression occurs in steps bounded by dollar amounts. With Social Security there are two bend points. Every dollar of AIME below the first bend point earns 90c in SS benefits. Between the first and second bend points each dollar earns 32c and past the second bend point they earn 15c. In 2026 the two bend points are going to be 1,286 and 7,749. Observe that there’s an indirect cap on benefits. Your AIME can’t be any higher than if you hit the maximum taxable earnings cap in the most recent 35 years (assuming the maximum taxable earnings cap always goes up).

Now we can talk about how much you get if you claim benefits early or late. It’s easy, your PIA is adjusted by a constant factor.

Now if you’re FIRE curious, you may not have 35 years in which you’ve put your max possible amount into SS every year, or even 35 full years on record. Max possible amount here is the lesser of the maximum taxable amount or whatever your practical earning limit is in your career. If you don’t have 35 years on record when you claim benefits, the SSA adds 0s as needed to get you up to 35 when doing the PIA calculation. As you add more earning years to your career you fill in those 0s and once you get past 35 every high earning year replaces a lower earnings year. I’ve got one year on record where I earned $900 for example. So every additional year you work brings up your ultimate benefit as long as you keep turning in top-35 year years. However, this is worth keeping in perspective. The most you can add to your AIME with one year of work is max taxable amount / 35 / 12 or about $400 in 2025. And then to convert that into benefits you apply the bend points. If your AIME is below the first bend point that gets you an extra $360 per month. Above it, that $400 earns you an extra $128. Above the second bend point it earns you an extra $60. You have to decide if the additional social security money every month after you claim it is worth working extra years. The SSA has this nice page going through the math for the max possible benefit. It shows that the max possible AIME in 2025 was $13,689. The last $6,298 which is above the second bend point contributes only $944 to the calculated PIA of $4,020. In other words you could have half the average income over 35 years and still get 3/4 as much in SS benefits per month. I should stress that the math changes dramatically though as your AIME gets lower and those extra years are worth way more. I don’t really have a pat conclusion here about how you should weigh this tradeoff, there’s just too many variables that you have to supply from your own life such as how you plan to fund your life after you stop working, when that will be, how much you want to be able to spend and how dependent you expect to be on the social security benefits.

Inflation adjustments

Oh no! Inflation will eat my benefits if I don’t work for 15 years before claiming social security! In a pleasant surprise that’s actually not the case. They index all your earnings to inflation at the time that they calculate your PIA. Then once benefits begin they are adjusted for cost of living yearly

Spousal benefits

One last thing I came across is the social security spousal benefit which might interest you if you’re in a marriage where the two spouses make substantially different amounts of money. Maybe one member is the ruthless capitalist and the other is doing actual good for the community. Both members of that couple potentially get to benefit from the ruthless capitalist because of the SS spousal benefit. As long as the capitalist claims benefits first, and the spouse retires at full retirement age, they get to take the greater of %50 of the capitalists PIA or their own calculated PIA. The percentage is reduced if the spouse retires early but doesn’t increase past 50% if they wait past full retirement age.

However when you do the math you might be surprised that the difference in PIA benefits between the two spouses isn’t as great as you think. The maximum taxable income cap combined with the progressive benefit calculation means that difference between two individuals incomes gets very compressed in the benefit calculation.

Which makes sense. Greater earning power doesn’t result in greater need for social security benefits. Quite the opposite. I’m just a dummy skimming through some documents I found but the benefit calculations seem like a pretty good balancing of tradeoffs to me. If you’re one of the 94% of Americans who are earning less than the maximum taxable income cap then you get more benefits for each dollar you pay into the system, however the additional benefits you get are progressively reduced which makes sense because you don’t necessarily need more just because you put more in and you have a greater ability to provide additional funds for your own retirement. I’m sure as you dig further into the data there’s improvements to be made but for now I’m way less upset by all this than I am about healthcare.