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A reader from Georgia is looking for clarification on the maximum taxable earnings regarding her husband's Social Security Statement.
"My spousal benefit will be higher than my own, so I looked at my husband's most recent Social Security Statement to get an idea of what I might expect. We both turn 62 this year. My husband is unsure when he will retire but will wait until he is 70 to file for benefits. He earns above the income limit taxed for Social Security and currently has 27 years above this limit, although he has low earning years due to education and medical training. I don't understand how they came up with the $147,000 he needs to keep earning to receive these benefits. I thought he would need to earn 35 years of income above the maximum taxable Social Security limit, currently $168,600. Would you please clarify this?"
The $147,000 you mentioned was the Social Security wage cap -- or maximum taxable earnings -- for 2022. When you look at your husband's Social Security Benefits Estimate Statement, Social Security makes a few assumptions when they tell you his benefit. And one of those assumptions is that he will continue to earn what he earned last year until he claims his benefits – at 70 in his case.
They're essentially pre-populating his earnings record with more years than he currently has, assuming he keeps working at his current earnings level. Since he has been earning at the maximum level, they're putting the $147,000 into his future earnings record.
You might be saying, "Well, the limit increases over time, and they're only assuming $147,000." That's technically true, but the estimates they're giving you are all in today's dollars. They're assuming no wage and other types of inflation in the calculation. They're not building in, "Oh, this age 70 benefit estimate assumes there will be 3% average inflation with cost-of-living adjustments." They're not making any of those adjustments.
You could say they're keeping all the dollar values in today's terms to make it easier for most people to find context by relating them to their current view of finances.
It is reasonable for Social Security to use that $147,000 assumption in projecting into the future, and it's literally based on what your husband made last year. Now, if he didn't have earnings last year, they would look back two years and use that number. And if he didn't have earnings for the past two years, they would assume he'd have no more earnings until he claimed.
What happened in the economy in the past year or two could affect benefit estimates. That is one reason I usually encourage people to use one of the online tools to calculate their benefit estimate and not use the statement that Social Security spits out. That's because of the assumptions they're making. I mentioned a couple here: (1) that he's going to continue making what he made last year until he claims, and (2) that there's going to be no future wage inflation. Those may or may not be reasonable assumptions for your husband's circumstances.
So, that's where that figure is coming from. You can count on those estimated benefits that assume your husband's earnings will be similar to his current level until he claims. But in terms of inflation that increases the annual limit, it obviously already has. The new limit in 2024 is $168,600, as you cited. That's already well above the $147,000 number used. So, we've already proven that assumption wrong since we know how 2023 and 2024 evolved.
But with the Social Security Benefits Estimate Statement, Social Security gives you a rough estimate of your husband's benefit (and hence, your spousal benefit).