The Original Purpose of Social Security: A Three-Legged Stool
Social Security is a cornerstone of the United States’ social safety net. Many Americans depend on this program to fund their retirement. The most recent data available from the Social Security Administration highlights the program’s critical role in retirement planning.
Social Security benefits account for approximately 30% of the income for individuals ages 65 and older. Retirement income was envisioned as a three-legged stool consisting of pensions, personal savings, and Social Security, each contributing one-third. The program was never intended to serve as the primary source of retirement income.
Many Lower-Income Retirees Rely Heavily on Social Security
- 51.8% of individuals ages 65 and older depend on Social Security for half or more of their income.
- 24.7% of people in this age group rely on it for 90% or more of their income.
Statistics Regarding Which Retirees Depend on Social Security
The extent of reliance varies significantly by income quintile; note the 1st quintile is the lowest 20% of taxable income and the 5th is the highest 20%:
1st quintile, 64.1% rely on Social Security for 90% or more of their income in retirement.
2nd quintile, 47.8% rely on Social Security for 90% or more of their income in retirement.
All the way up to the 5th quintile, none of whom rely on Social Security for 90% or more of their income in retirement.
Can Social Security Survive Beyond 2033?
The program faces significant challenges. Without reform, Social Security will not be able to pay full benefits by 2033. This presents a critical issue for Congress, as reductions in benefits are politically and socially untenable. Many changes are being made to the program via the Department of Government Efficiency. Further The Social Security Fairness Act was passed into law on January 5th, 2025 and this brought more changes to the program.
How Social Security Benefits Are Calculated
Despite its importance, many people are unaware of how their Social Security benefits are calculated. Since the Social Security Administration ceased mailing statements in 2011, individuals must proactively set up an online account to access this information.
The benefit formula is intentionally progressive, favoring lower-income earners by replacing a higher percentage of their income. For higher-income earners, Social Security becomes less significant as a percentage of their total retirement income.
Terminology For Calculating Your Social Security Benefit
1. Credits: To qualify, individuals must earn 40 credits. In 2025, one credit is earned for every $1,810 in covered earnings (most often wages), with up to four credits given annually.
2. Average Indexed Monthly Earnings: The AIME figure is based on a worker’s 35 highest-earning years, adjusted for inflation. If fewer than 35 years of earnings exist, zeros are averaged in.
3. Primary Insurance Amount: This is the monthly benefit a person receives at full retirement age. PIA is calculated using a formula adjusted annually for inflation.
2025 Social Security Payout Example: How the Formula Works
Bend points are critical to the calculation and can be used to ensure you draw as much as possible in retirement.
For a retiree with an AIME of $7,391 (This is annual wages of $88,692 in 2025 dollars):
• 90% of the first $1,226 = $1,103.40
• 32% of the amount between $1,226 and $7,391 = $1,972.80.
• Total PIA = $3,076.20 (before Medicare premiums).
Strategies to Maximize Your Social Security Benefits
To optimize benefits:
• Aim for an AIME of at least $1,226, as the first tier yields a 90% replacement rate.
• Understand that amounts above $7,391 are replaced at only 15%.
Reviewing your lifetime earnings is crucial to ensure accuracy. Errors are far easier to correct early on than later on, when reconstructing decades-old income records may be challenging.
Will Your Social Security Be Taxed? What Retirees Should Know
Since 1983, up to 85% of Social Security income has been subject to federal taxes, depending on other income sources. This makes the program more progressive but also adds complexity to retirement planning. Consider discussing this with your tax professional and financial planner.
When Should You Start Collecting Social Security?
When to begin drawing Social Security benefits is a critical decision, particularly for married couples. Meeting with a qualified financial planner may be appropriate. Starting benefits early results in reduced monthly payments, while delaying up to age 70 increases them. Careful analysis and planning are essential to maximize lifelong benefits.
Final Thoughts: Why Understanding Social Security Matters More Than Ever
Social Security is a vital program for most Americans. Understanding its mechanics and planning effectively can significantly impact your retirement security and should be carefully considered before retirement.
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