Originally Published: January 8, 2013 9:57 p.m.
I would like to expand on Bill Huth's letter to the editor of Jan. 3 entitled "Social Security needs a major fix." Mr. Huth notes that the social security payroll tax is "grossly regressive, hitting low incomes much more than the high incomes." That is because all wage earners pay the same 6.2 percent rate up to the earnings maximum of $113,700 for 2013.
It could also be noted that lower-wage earners receive a better return on their investment than do higher earners. For example, a wage earner whose earnings base is about 23 percent of the maximum would receive a social security benefit replacing approximately 50 percent of those earnings. A worker taxed on maximum earnings would replace but 27 percent.
The formula for computing benefits starts with average annual covered earnings over the worker's highest 35 earnings years. Years with no earnings would bring the average down. All but the most recent earnings are indexed for wage inflation. The benefit calculation is made in three steps by multiplying the final average indexed monthly earnings in segments by decreasing percentages.
For example, in 1988 (the last time I calculated a benefit), assuming $2,355 average indexed monthly earnings: 90 percent of the first $339 plus 32 percent of the next $1,705, plus 15 percent of the amount over generates a benefit of $897 per month (305+545+47).
You can see that the percentages are more generous at lower earning levels. The dollar cutoffs for the calculation change year by year, but the percentage rates remain the same.
I am a retired Human Resources Manager with some expertise in retirement planning and an undergraduate degree in economics.