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How is Social Security funded?

Social Security is funded through a dedicated payroll tax — of 6.2% of wages up to a certain limit — that both employers and employees pay.

The SSA sets a limit of the amount of earnings subject to taxation each year. This limit — known as the contribution and benefit base, or the taxable maximum — changes each year in line with the national average wage index.

In 2023, the taxable maximum is $160,200 and the resulting maximum Social Security tax is $9,932.40. Next year, the wage base limit will increase to $168,600 and the maximum Social Security tax will be $10,453 — still petty cash for billionaires.

A Medicare tax is also deducted from your monthly paycheck at a rate of 1.45% to pay for Medicare Part A, which provides hospital insurance to seniors and people with disabilities. Unlike the Social Security tax, there is no maximum wage limit for Medicare tax — but if you earn more than $200,000 in a calendar year, your employer must withhold an additional 0.9%.

If you earned more than the taxable maximum for Social Security in any year — whether that’s at one job or more than one — you will only be taxed up to those thresholds. So, the maximum you’ll pay into the system is the same if you earn $170,000 or $1.7 million.

This is quite beneficial for the nation’s wealthiest individuals because it means they end up only paying Social Security tax on a small portion of their earnings, when most Americans pay taxes on 100% of their earnings.

This is interesting in the case of Buffett, who has kept his annual salary at a relatively modest $100,000 for the past 40 years — which would technically mean he’s been below the Social Security wage base limit since 2008. But, the Berkshire Hathaway co-founder has received additional income in directors' fees and security costs over the years that have lifted his earnings above the threshold.

You may be thinking — what about the rest of Buffett’s vast riches? Well, a significant portion of his income comes from capital gains in his investment portfolio, which is not considered earnings for Social Security purposes.

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Average benefit payments (and how to maximize yours)

If you’re aged 62 or older and you’ve worked and paid Social Security taxes for 10 years or more, you’re eligible to receive retirement benefits — regardless of whether you’re a millionaire or you’re living paycheck to paycheck.

As of September 2023, there were almost 67 million Social Security claimants, receiving an average monthly benefit of $1,706, according to SSA data. That equates to $20,472 per claimant for the year — which is far more meaningful for those who earned a lower income than those who earned mighty six-figure salaries.

The earliest Amercians can start claiming Social Security is 62. But those who opt to delay until they hit their full retirement age of 66 to 67 (depending on your birth year) will receive higher monthly payments, with the maximum benefits available to those who wait to claim aged 70 or older.

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Those who reached full retirement age of 67 in 2023 could receive a maximum monthly benefit of $3,627. But if you started claiming at 62 this year, the maximum monthly payment you’ll get is $2,572 — that’s 29% less. If you waited until 70 to start collecting benefits, you could have claimed a maximum monthly sum of up to $4,555 — almost $2,000 more a month than those who are claiming at 62.

Social Security benefits in 2024 are projected to rise and a worker retiring at full retirement age will receive $3,822 a month. But if you decide to retire early at the age of 62 in 2024, your maximum monthly benefit will be $2,710, and if you’ve waited to claim at the age of 70, you’ll get a maximum monthly check of $4,873.

The math speaks for itself: the longer you wait to claim Social Security, the bigger your monthly benefit. But while rich Americans can easily wait until age 70 to claim the maximum benefit, many feel the need to claim early (despite the financial penalty) to help them get by.

Crunching the numbers on Social Security

Simply put, Social Security costs a lot of money. It is the largest category of federal spending, along with health care — and it is drawing a lot of critical eyeballs amid the nation’s $33 trillion debt crisis.

Deficits in the program are projected to increase as more baby boomers retire and swell the ranks for Social Security recipients. The number of Americans in that age and retirement bracket is projected to grow from about 58 million in 2022 to about 75 million by 2035.

Christie and fellow GOP candidate Nikki Haley both argued the federal government simply cannot continue to meet the bill for seniors who are living longer and longer. They both proposed increasing the retirement age for younger workers — without cutting entitlement benefits for current seniors — but they dodged giving a specific age, explaining that it would come down to negotiations with Congress.

“Any candidate that tells you they’re not going to take on entitlements is not being serious,” said Haley, a former U.S. Ambassador to the UN. “Social Security will go bankrupt in 10 years, Medicare will go bankrupt in eight.”

As well as increasing the retirement age for younger workers, Haley would like to “limit benefits on the wealthy” and then expand Medicare Advantage plans because “seniors love that.” She added: “That’s how we’ll deal with entitlement reform and that’s how we’ll bring down that debt.”

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Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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