Saturday, March 15, 2008

I retired from the federal government on 12/31/03 at age 69 with past earnings above the maximum level. I worked full time and also received SS benefits in 2003. My monthly benefit was $1935 in 2004 increasing with COLA to $2186 in 2008. Looking at Appendix D in your handbook, I notice that maximum earning level monthly SS benefits for retirement at age 70 incease much faster than COLA (for example, from 2004 to 2005 at 6.7%, from 2005 to 2006 at 7.5%, and from 2006 to 2007 at 10.4%). It seems unfair that future retirees receive much greater monthly benefits than I because their annual increase is not constrained by COLA.
Bill from Maryland

There are many such "inequalities" in the social security system just as in all social programs. But there is a reason for this one that makes it less "unjust" than it may appear. The later beneficiaries are not receiving a higher COLA than earlier ones. COLAs are the same for every beneficiary. Rather, the base benefit, the "primary insurance amount" (PIA) is higher for later retiress because the average wages used in the computations of benefits is higher for later retirees. The computation for a benefit amount uses the highest 35 years of earnings, subject to each year's maximum covered (and therefore taxed) amount. For a discussion of how benefits are calculated, see Section 702.2 in Chapter 7 of my book. So retirees with maximum earnings all along will have higher covered earning in the last years, because the maximum amount of earning subject to SS "contributions" (i.e. taxes) keeps rising in a rather frantic attempt to extract revenues to pay benefits. For example, the 2008 maximum for covered earnings is $102,000. 35 years ago in 1973 the maximum was $10,800. In 2003 when you retired, the maximum was $87,000. So taxes for maximum earners in 2008 are 17% higher than they were just 5 years ago in 2003, without raising the rates, just the covered amount. So overall, over 35 years of earnings, later retirees have higher average monthly earnings (from which benefits are calculated) and have also paid more in "contributions" to the system. So it's not as unfair as it seems just by comparing benefit amounts.

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