Social Security is a part of retirement investing-the part that promises to extend the continuity of steady income in retired life. Benefits are not, therefore, flat but depend on individual earnings, record of work, and retirement time. The highly paid staff, for instance, those earning $180,000, would have to be informed of how their Social Security benefits accrue and what they would expect at the beginning of retirement.
Maximum taxable earnings and contribution limits
The SSA sets each year the maximum amount of earnings subject to Social Security taxes, also called the “taxable maximum.” For 2025, this limit is $176,100.
This means that any income earned above this threshold is not subject to Social Security taxes and does not count toward the calculation of Social Security benefits.
Workers and employers each pay 6.2 percent of earnings up to the taxable maximum. Thus for a worker earning $180,000 in 2025, the worker and employer would each pay 6.2% of $176,100, or $10,918.20 a year. An individual’s earnings in excess of $3,900 are not subject to Social Security taxes because those earnings fall above the taxable maximum.
Computing Social Security benefits
Benefits are calculated using a formula based on your highest 35 years of earnings, indexed for inflation. It calculates your Average Indexed Monthly Earnings then applies a progressive formula to derive your Primary Insurance Amount-the amount you would be entitled to at full retirement age.
The formula for computing PIA takes as inputs three bend points, or dollar amounts, that increase each year by average wage growth. For ease of explanation, suppose that the following three bend points apply:
- 90 percent of the first $1,000 of AIME, plus
- 32 percent of AIME greater than $1,000 and up to $6,000, plus
- 15 percent of AIME above $6,000.
These values are used for illustrative purposes only; actual 2025 bend points will be different.
Effects of high earnings on benefits
Earning $180,000 per year means that some of your earnings are above the taxable maximum. That is, only the first $176,100 of your 2025 earnings will be subject to Social Security taxes and used in calculating your Social Security benefits. Earning at or above the taxable maximum every year for 35 years can increase your Social Security benefits, but there is a limit.
For example, for someone retiring at full retirement age, the estimated maximum Social Security benefit in 2025 is $4,018 per month, or about $48,216 annually.
This is the maximum anyone can get, regardless of how much more they might earn over the taxable maximum.
Retirement age considerations
The age at which one begins to get their Social Security benefits has a major consequence on an individual’s total amount that they are able to receive.
- Full retirement age (FRA): If one is born in the year 1990, his/her FRA is 67.
- Early retirement: A person can start receiving retirement benefits as early as 62, with the monthly benefit lowered to reflect one’s receiving payment for a longer period of time.
- Delayed retirement: Similarly, delayed retirement after FRA may increase one’s monthly benefit due to delayed retirement credits until age 70.
Note however, that while delaying benefits increases your monthly benefit amount, it does not affect the maximum amount of earnings subject to tax and the computation of your AIME.
Cost of living adjustments (COLA)
The increase in the Social Security benefit matches every year according to increased cost of living. For this year 2025, this has a beneficiary increase of 2.5%.
This protects Social Security income purchasing power across an individual’s lifetime.
Planning your retirement
Social Security, however, is only one source of replacement income in retirement and is designed to replace just a portion of your pre-retirement earnings. The higher one’s earnings are, the smaller the percent of their income that is replaced by Social Security.
In this regard, supplementation of these two with 401(k) plans, IRAs, and other types of investment for a comfortable post-retirement life would be very sensible.
