Some people get a lot less for their money from Social Security than others. You may be one of them.
Here’s a test to tell whether you’re paying a high, but invisible tax.
Question: Has your earned income been above average most, or all, of your working career?
If you answered “yes,” odds are you have been paying an 85 percent tax rate on a portion of our wretchedly complicated federal tax and benefit system. Most people pay the tax at rates between 15 and 32 percent.
Quite a difference.
And, yes, you read that right. The highest federal income tax rate is 37 percent. But our Social Security benefit system is hitting you with an effective 85 percent tax rate.
This is not an evil conspiracy of Bilderbergers, the International Communist Party or any mysterious group believed to be pulling the strings of government puppets. It is social insurance. It is how Social Security does what it was designed to do – provide a basic retirement income for all.
So it isn’t an evil conspiracy. It is, however, a reality. It should be considered by anyone who wants to tinker with changing the benefits millions of workers have been promised. Not to mention have paid for in every single paycheck.
With Social Security approaching a financial crisis in less than a decade, it’s important that we understand how the current system determines benefits.
Here’s how the system works.
Our future Social Security benefit is calculated using a complex index formula to determine how much of our income is credited. Basically, income is credited in three steps.
—For 2026 the first $1,286 of monthly income is credited at 90 percent.
—Monthly income between $1,286 and $7,749 is credited at 32 percent.
—Monthly income over $7,749 to the wage base maximum of $15,375 is credited at 15 percent. (You can read about this on the Social Security website here.)
About 94 percent of all workers earn less than the current $15,375 monthly wage base maximum, or $184,500 a year. Earned income over that amount isn’t subject to the employment tax that funds Social Security. It also accrues no further benefit increases.
What Goes In. And What Goes Out.
You can see the impact this has on what you get for the employment taxes you paid in by reading an obscure table. It appears every year in the annual report of the trustees for Social Security.
Its viscerally compelling title is: “Table V.C7. –Annual Scheduled Benefit Amounts for Retired Workers With Various Pre-Retirement Earnings Patterns Based on Intermediate Assumptions, Calendar Years 2025-2100”
Here, extracted from that table, is the replacement percentage of average 35-year earnings at full retirement age (currently 67) for workers at different income levels:
—Very Low Earnings (25 percent of average earnings) 75.2%
—Low Earnings (45 percent of average earnings) 54.8%
—Medium Earnings (100 percent of average earnings) 40.8%
—High Earnings (160 percent of average earnings) 33.5%
—Maximum Earnings 26.8%
As you can see, some get more than others. The lowest earners get nearly three times more than the highest earners.
So while we pay the same rate of taxes in, the level of benefits we receive drops significantly due to the lower crediting rate at higher income.
The “Money’s Worth” View
The actuaries who work for the Social Security trustees also examine this question another way. They produce “Money’s Worth” notes, an annual report that examines how much individuals and couples at different income levels receive compared to how much they paid in. (You can read a column on the subject here or check out their notes here.)
That study confirms the basic finding. Low-income individuals get more back than they pay in. High-income individuals get back less than they pay in. High-income, two-earner households generally get the worst deal. They receive much less than they pay in.
Then the Tax Torpedo
Neither of these exercises considers the taxation of Social Security benefits. While the tax affected very few retirees when it was first passed in 1984, more retirees have paid taxes on their benefits every year because the amounts in the law weren’t keyed to inflation. I’ve called this the Tax Torpedo for decades.
In 2016 a Social Security research study estimated that 10 percent of retirees paid taxes on benefits in that year. The study projected that 50 percent would pay taxes on benefits by 2050.
The recent tax reform bill (OBBRA) indirectly reduced the number of retirees paying taxes on Social Security benefits by increasing broad household deductions. But the lack of inflation adjustment means the tax will continue to affect an increasing number of retirees. (You can read the Center for Retirement Research note here.)
I mention the taxation of benefits because this tax further reduces the net benefit retirees with higher-than-average lifetime earnings receive. In effect, Social Security benefits are already means-tested — they are reduced by taxes when your income exceeds levels no one would call grand.
Why I’m Telling You This
Soon we’ll be seeing a flood of suggestions to “save Social Security.” They will come from the scabrous, lie-for-a-living creeps otherwise known as representatives and senators. They will claim expertise, wisdom and deep economic knowledge.
When this happens, remember one thing.
This same crew has presided over decades of over-spending and under-taxing. They spent every dime of extra tax money workers have paid into Social Security since 1984. Every dime.
That money would have been enough to secure the benefits of current retirees and the benefits their children.
Then they borrowed more.
Related columns:
Scott Burns, “Is Social Security A Good Deal?” 7/7/2013: https://scottburns.com/is-social-security-a-good-deal/
Scott Burns, “How the Tax Torpedo Hits,” 2/11/2003: https://scottburns.com/how-the-tax-torpedo-hits/
Sources and References:
Social Security Trustees Report 2025: https://www.ssa.gov/oact/TR/2025/
Table V.C7: https://www.ssa.gov/oact/TR/2025/V_C_prog.html#42
SSA.gov, Primary Insurance Amount: https://www.ssa.gov/oact/cola/piaformula.html
SSA.gov, Money’s Worth Ratios: https://www.ssa.gov/OACT/NOTES/ran7/index.html
SSA.gov, “Income Taxes on Social Security Benefits,” December, 2016:
https://www.ssa.gov/policy/docs/research-summaries/income-taxes-on-benefits.html
Center for Retirement Research at Boston College, “New Tax Break for Seniors,” 1/22/2026:
https://crr.bc.edu/new-tax-break-for-seniors/
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo: Scott Burns, 6/17/2023: Remembering walking the Camino de Santiago
(c) Scott Burns, 2026