High Salary, Lost Benefits: The Unintended Consequences of Earning More

When it comes to Social Security benefits, many of us assume that earning more money will only increase the amount of taxes we pay. However, a high salary can have some unintended consequences for those who are nearing retirement age. According to a Social Security Administration report, individuals with a higher income may receive lower Social Security benefits than they expect.

But why is this the case? And what can you do to protect your benefits? In this article, we’ll explore the complex and often counterintuitive relationship between income and Social Security benefits. We’ll also delve into the factors that affect your benefits, and provide tips on how to plan for a secure retirement.

Main Factors That Affect Your Social Security Benefits

Before we dive into the impact of high salary on Social Security benefits, it’s essential to understand the formulas used to calculate benefits. Social Security benefits are based on your 35 highest-earning years, with a maximum amount of earnings subject to the payroll tax.

The payroll tax, also known as the Old-Age, Survivors, and Disability Insurance (OASDI) tax, is a tax on wages and taxes self-employment income. The tax rate is 12.4% on both the employee and employer sides, but if one earns below the full retirement age ($133,500 in 2022), they get a credit because tax is only applied to their earnings below this threshold. However, if you earn a high salary, you may pay taxes on more income, which can increase the amount of taxes withheld from your Social Security benefits in retirement, ultimately resulting in lower benefits.

The Impact of High Salary on Social Security Benefits

The SSA.gov also provides a benefit payment calculator where users can calculate the $0 to $4,000 they get from this tax. However, as said by WSJ journalist David Finger Katz, “if one earns a high salary,  the high tax withheld from Social Security could more than offset the benefits earned”