What Is the Minimum Social Security Benefit?

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One major Social Security issue of this presidential election cycle has been minimum Social Security benefits, and whether or not we should raise them. Several candidates on both sides of the political spectrum (yes, even Republicans) argued in favor of a higher minimum benefit to prevent any retirees from living in poverty. So, how low are the current minimums, and how much of a raise would we need to keep retirees above the poverty line?

How Social Security benefits are calculated

In order to be eligible for Social Security retirement benefits, you'll need to earn a total of 40 "credits" over the course of your working lifetime. In 2016, you'll get one credit for every $1,260 in Social Security taxable earnings, and there is a maximum of four per year. So, to become eligible, you'll need to work for at least 10 years with earnings of at least $5,040 per year. (Note: The earnings amount required for one credit adjusts annually.)

Once you're determined to be eligible, your monthly average earnings are calculated using your 35 highest-earning years of Social Security taxable wages (adjusted for inflation), which are limited by a wage cap that adjusts annually. If you work for fewer than 35 years, wages of zero will be factored in for the remaining years. The Social Security Administration publishes a worksheet(link opens PDF) that can help you calculate this on your own.

Your monthly average is then plugged into a formula to determine your primary insurance amount (PIA), or your monthly Social Security benefit if you start collecting at your full retirement age. As of 2016, the formula is:

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  • 90% of the first $856
  • 32% of the amount greater than $856 but less than $5,157
  • 15% of the amount above $5,157

For example, if your average monthly earnings were $4,000, this formula says that you'll get a monthly retirement benefit of $1,776.48.

A special formula for minimum benefits

Since 1973, the Social Security Administration has used an alternative way of determining benefits for low-income retirees known as the special minimum benefit. Basically, it uses a worker's "years of coverage" to establish a minimum Social Security payment, not their earnings.

For 2016, one year of coverage is defined as Social Security earnings of at least $13,230, and this amount is adjusted each year. Based on the beneficiary's years of coverage (at least 11, at most 30), this program establishes a minimum primary insurance amount. Here are a few of the current special minimum benefit amounts.

Years of Coverage

Special Minimum Primary Insurance Amount

11

$39.90

15

$205.80

20

$414.00

25

$621.80

30

$829.80

Data source: Social Security Administration.

It's important to note that the special minimum benefit is price-indexed, while the regular method of calculating benefits is wage-indexed. Since wages generally grow faster than prices, the standard calculation method has grown more rapidly than the special minimum benefit to the point where new beneficiaries rarely receive the special minimum -- their standard PIA is almost always higher. In fact, 2018 is projected to be the last year when new retirees could theoretically be eligible for a special benefit.

In a nutshell, the special minimum benefit is being used less and less these days, and is so low in comparison with most workers' PIA that it's nearly irrelevant to new beneficiaries.

What the minimum benefit should be to keep retirees out of poverty

When politicians say things like "no retiree should be living in poverty," the exact group of people they're talking about can vary. Specifically, how many years of work makes someone a retiree? The most common definition seems to include people who have worked for 30 years or more, but keep in mind that different politicians have differing thoughts on this matter.

As of 2016, the federal poverty level (FPL) for an individual is $11,880, which translates to $990 per month -- nearly 20% greater than the current 30-year special minimum benefit. It's also worth noting that the federal poverty level for a couple is $16,020, and that this type of minimum benefit increase when combined with the Social Security spousal benefit program would also ensure that no retired couple would live in poverty, as long as one of the two spouses worked for 30 years or more.

The article What Is the Minimum Social Security Benefit? originally appeared on Fool.com.

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