It’s tax season and a good time to look at how what you pay in Social Security taxes is reflected in your eligibility for benefits. There are several types of claims for disability, but they all have the same bottom-line medical definitions of disability. The difference is how the amount of the benefit you receive is determined.
Supplemental Security Income (SSI), for instance is based on the individual’s income and access to financial resources. It is not funded by the individual’s work credits. SSDI benefits (what most people call “disability”), on the other hand, are funded by what you pay into Social Security. To be “insured” for disability you generally must have worked for five of the last ten years, or have earned 20 credits over the course of a ten year period. In 2021 you earn one work credit for each $1,470 in taxable earnings. You can earn as many as four work credits in a year. That means that, in 2021, $5,880 in taxable earnings gets you your full work credits for the year. That however doesn’t mean that the individual who earns $5,880 in a year gets the same in disability benefits as the person who earns $25,000, or $50,000, or $100,000 in a year.
How do your Social Security taxes work? You pay 6.2% of your taxable income in Social Security tax. Your employer also pays 6.2%, so 12.4% is paid in total. The wage base limit in 2021 is $142,800 (meaning you pay 6.2% of your income up to $142,800, but don’t pay any Social Security taxes on earnings above that amount). The maximum an individual can pay into Social Security in 2021 is $8,853.60, with the employer paying the same amount.
I frequently hear from clients that they just want to get back the money that they paid into the system. When I hear this I firmly believe that most don’t realize what they have actually paid. So, I’ll give you three examples based on the earnings histories of three very different clients.
1) “Ed” is in his early 60s, had a long and successful career. He was in the workforce for 41 years earning as much as $110,000 a year late in his career. In earned a little over $2,400,000 over his lifetime, meaning that he paid something along the lines of $149,000 in Social Security taxes (6.2% of the 2.4 million). That’s almost $300,000 in Social Security tax payments between Ed and his employer.
Ed’s expected Social Security benefit is about $2800 a month. If you count in the employer’s portion of the taxes the claimant’s monthly Social Security benefit would pay back the amount paid in taxes in a little less than 9 years (that’s $300,000/12/$2800).
Ed’s calculation doesn’t take into account return on investment that he could have made on the money, so it’s admittedly a simplistic view.
2) “Sarah” is 59 and worked about 25 years in varying capacities. The most she earned in a year was $19,000. She made a little over $150,000 in her career and personally paid just over $9,000 in Social Security taxes. Her expected benefit is a little over $700 per month. In a just over two years of benefit payments she will have been paid out the total amount of both her and her employer’s Social Security tax payments ($18,600/12/$700). Sarah will probably receive benefits for 15 to 20 years, for somewhere between $126,000 and $168,000 in lifetime payments.
3) Finally, there’s “Ron.” Ron worked through his life and probably had good jobs that paid him well. But he didn’t pay much in Social Security taxes. He’s 57. His lifetime reported earnings were $14,290, for in $886 in Social Security taxes. He doesn’t qualify for SSDI benefits and doesn’t have enough work credits to get Social Security Retirement benefits. He was approved for a little over $200 in SSI benefits (so low because of his spouse’s income). Ron will probably get 15 to 20 years of payments coming to $36,000 in lifetime payments on the low side. But those payments will vary based on other sources of income in his household and the availability of other resources.
When it is comes down to it, none of these people actually want back what they paid in at this point. For Ed and Sarah, their Social Security tax payments will have turned out to be a decent investment. Perhaps they would have done better by investing the money themselves or perhaps they wouldn’t have invested that money at all if it hadn’t been paid into the Social Security system (a policy discussion for another time). But, those payments were a sure way for them to have a source of income for the remainder of their lives, even though they had to stop working earlier than anticipated due to disability.
One final word to include Medicare: the Medicare tax rate is 2.9% and separate from the Social Security tax payments. The value of Medicare benefits is worth an article of its own at some point.