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SOCIAL SECURITY’S complexity never fails to surprise. While many retirees have some sense for what factors determine the size of their Social Security check, few appreciate just how involved the benefits calculation can be.
For example, have you ever wondered what the Social Security Administration does if you continue working after starting benefits? It’s not a simple answer. There are two distinct treatments depending on whether you start benefits before or after you reach your full Social Security retirement age, which is age 66 or 67, depending on the year you were born.
If you start collecting Social Security prior to reaching your full retirement age, any employment income is subject to an earnings test and could cause a benefit reduction. The earnings test threshold in 2022 is $19,560. The government reduces your benefit by one dollar for every two dollars you earn above that amount.
The reduction becomes much less severe in the year you reach your full retirement age. You lose one dollar for every three dollars earned above $51,960. The benefits that were withheld prior to full retirement age aren’t necessarily lost forever. Once you reach your full retirement age, your monthly benefit is adjusted upward to reflect the benefits surrendered over the prior years. And at that point, you can earn as much as you want, with no reduction in your Social Security benefit.
The complexity doesn’t stop there. In some cases, additional work can actually raise the Social Security benefit you receive.
I recently spoke with a neighbor who was in this position. He had been advised to file for Social Security at his full retirement age of 66, even though he planned to work longer. This strategy might not make sense at first. He didn’t need his Social Security check to cover his living expenses, so why not wait? Delaying to 70, after all, would increase his benefit about 32%.
His financial advisor noted, however, that his additional years of earned income beyond age 66 could raise his Social Security payout, thus helping to offset the reduction from claiming before age 70. I was skeptical until I worked through the math myself and researched how the government calculates Social Security benefits.
The first number the Social Security Administration uses to calculate your retirement benefit is your lifetime earnings total. They add up all of the money you made during the 35 highest-earning years of your career, adjust that sum for inflation, and then divide it by 420.
This calculation results in your average indexed monthly earnings, which you can think of as your inflation-adjusted average monthly wage. The government uses this number to determine your primary insurance amount, which is the benefit you receive if you file at your full retirement age.
So how can extra work raise benefits? If one of your working years after claiming benefits is one of your 35 highest, it would replace one of your lower-earning years and raise your overall average. If your additional year of income doesn’t crack your top 35, it wouldn’t affect your Social Security benefit.
The folks at the Social Security Administration take additional earning years into account through an automatic process called recomputation. This process usually occurs in the fall and the recomputed amount typically takes effect the following January. Recomputation cannot lower someone’s existing benefit.
If you enjoy complex calculations, financial planning expert Michael Kitces has an excellent article on how your average indexed monthly earnings and primary insurance amount are calculated. You can use this information to see if your benefits would increase with an additional year of work. You can also do the math on the Social Security website.
Here’s how: Log into your “my Social Security” account. While there, check your earnings record to see if there are any lower earnings years you can easily replace. Then scroll down to the “Plan For Retirement” tool and select the option to incorporate future yearly earnings. By running estimates with and without potential future earnings, you can see the impact of additional years of work.
I ran the analysis for myself, looking at claiming benefits at three different ages. For context, I was age 64 and eight months when I went through this exercise. In my first test, I started benefits on Jan. 1, 2023. If I earned the maximum taxable amount of $147,000 in 2022, my benefit would be $33 per month greater than if I earned nothing.
I then tested starting benefits at my full retirement age of 66 and 6 months. If I earned the maximum taxable amount until then, my benefit would be $69 per month greater than if I earned no income. This may not sound like a lot, but it amounts to $828 per year for the rest of my life.
Finally, I tested starting benefits at age 70. If I earned the maximum taxable amount to that point, my benefit would be greater by $174 per month, or $2,088 per year.
The upshot: Additional years of work in your 60s do indeed have the potential to improve your Social Security benefits if you have fewer than 35 working years or if you have any low income years in your earnings total. Still, the decision of when to claim benefits carries much more weight.
For instance, by delaying Social Security to age 70, I could increase my benefit by $896 per month, or $10,752 per year, compared to claiming at my full retirement age. That decision cannot be made in a vacuum, however. It would take me 14 years at the higher benefit amount to offset the benefits I would forgo between my full retirement age and age 70. If I am confident that I’ll live that long, delaying benefits might make sense. If I am not as confident about my health, it may be better to claim benefits sooner.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.
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I thought I would get the maximum after more than 35 years of paying in the max amount. Turns out that early years in the 70’s, even though the max FICA was paid, did not adjust enough in the benefit calculation leaving me short about $78.
polamalu2009 Paying the max SS earning for 35 years doesn’t mean that some of those earlier max earning years — even when indexed to reflect the average wage inflation — are not being replaced by later max earning years that are a higher dollar amount.
Excellent summary of a complex issue. In addition to the online calculator, there is a detailed calculator (anypia.exe) that can be downloaded. While the online calculator is easier the use, anypia has the advantage of storing calculations on your computer that can be easily adjusted to investigate different options.
https://www.ssa.gov/oact/anypia/anypia.html
Rick nice SS exercise. I frequently check out my account and have been pleased that the website now gives benefit amounts from my current age and for each year up to age 70. Now people can see how the benefit from waiting helps year by year. When I look at claiming at age 70 versus age 69 I show an increase of 10%! Strange.
Thanks, Richard, for explaining how SS benefits are calculated. As for when to claim, I like to think of SS as an insurance policy. If I’m fortunate enough to not need SS before age 70, the larger monthly checks I’ll receive after that are a form of longevity insurance. And it’s unlikely that on my deathbed I would worry about not having received my full share.
A valid point many people follow. On the other hand, one could take SS at full retirement age and invest the proceeds and if not needed or partially needed the remaining investment goes to heirs.
I took mine like that while still working and invested it in municipal bond funds and have been reinvesting the tax-free interest for over a decade.
One could also wait and claim at SS at 70 and then invest the difference between the higher SS benefit and what one would have received if they had claimed at their FRA each month from age 70 on. In my case, this meant waiting four years to claim (and to invest), but I now have 32% more to invest than I would have if I had claimed at 66.
What I like about this is that it makes it clear that what you pay in SS taxes is unrelated to one’s benefit. So many people equate the two as if they have paid for their benefits.
All benefits are determined by provisions of the law and regulations. The funding via payroll taxes, etc. is totally separate and as we know, inadequate.
That is an incorrect summary of what this article makes clear.
For the vast majority of people who make less than the taxable maximum what they pay in SS taxes is a fixed percentage of their income. The more you make the more you pay in SS taxes.
What they receive in benefits social security takes your highest inflation adjusted 35 years of income and divides by 420 to determine your average indexed monthly earnings which is then used to compute your monthly benefit amount. The more you make the higher your benefits.
As this article makes clear for those make below the taxable maximum, the more you pay is SS taxes the higher your monthly benefit amount.
Sorry, you are not correct. The funding through taxes is not directly related to benefits for any individual. Taxes can be raised but not the benefit formula and visa versa. If taxes were related your benefit could stop when you received all paid in taxes on your behalf.
In addition, millions of people are receiving SS benefits who never paid a penny in taxes – children, some disabled people, spouses and ex-spouses (sometimes simultaneously) for example.
Collectively benefits are funded through payroll taxes, income taxes paid on the SS benefit and interest paid to the trust.
Because payroll taxes are based on wages, it may appear there is a relationship to the eventual benefit, but there is not. Funding and benefits are independent.
But I am. Your logic is faulty as Parkslope also points out. If you pay more in SS taxes, then your benefits are higher and that is the definition of related. Your sweeping statement that “what you pay in SS taxes is unrelated to one’s benefit” is clearly wrong.
I think I see the point you are trying to make, and it has to do with funding of the benefit stream. While the size of the benefit payment is related to SS taxes paid by someone the amount of SS taxes paid is not enough to fund the benefits paid. On that point I agree.
I don’t agree with your logic. For example, if the amount one pays in SS taxes is unrelated to SS benefits then the average SS benefit for those who never pay a penny in taxes would be the same as the average benefit for those who paid the maximum SS tax for each of 35 years.
You are mixing taxes paid and earnings. Earnings is what matters along with the benefit formula. Benefits are paid from more than the payroll taxes collected.
In 2020, $1.001 trillion (89.6 percent) of total Old-Age and Survivors Insurance and Disability Insurance income came from payroll taxes. The remainder was provided by interest earnings $76 billion (6.8 percent) and revenue from taxation of OASDI benefits $41 billion (3.6 percent).
Regardless of the sources of SS benefits, a positive correlation between SS taxes paid and benefits received means that the two are related.
Thanks. SS is a fascinating topic because 1) it’s amazing complicated, and 2) it has such an emotional hold on many people. I have fond memories of friendly arguments at work about whether SS was a retirement account, or a government insurance policy. Even rocket scientists couldn’t agree.
It surely isn’t a retirement account.
Great article Richard. Not that I’m complaining but I’m trying to figure out how my benefit went up further beyond this year’s COLA. I’m a physician nearly 71. Began taking SS age 70 and am still working. Have been in the max social security earnings for over 35 years yet it still went up. Any idea how that happened?
“Up to 35 years of earnings are needed to compute average indexed monthly earnings. After we determine the number of years, we choose those years with the highest indexed earnings, sum such indexed earnings, and divide the total amount by the total number of months in those years. We then round the resulting average amount down to the next lower dollar amount. The result is the AIME.
An insured worker becomes eligible for retirement benefits when he or she reaches age 62. If 2022 were the year of eligibility, we would divide the national average wage index for 2020 (55,628.60) by the national average wage index for each year prior to 2020 in which the worker had earnings and multiply each such ratio by the worker’s earnings. This would give the indexed earnings for each year prior to 2020. We would consider any earnings in or after 2020 at face value, without indexing. Then we would compute the AIME and use this amount in computing the worker’s primary insurance amount for 2022.”
https://www.ssa.gov/oact/cola/Benefits.html#aime
The fact that earnings after the indexing year are taken at face value means that they could replace indexed years even if your earnings exceeded the maximum.
The following article might shed some light on your inquiry. Note that since you are still working, it appears as though your maximum wage base is still changing, depending on which “high 35” is used to compute your benefit. This number can go up, but it cannot go down, as Richard points out.
https://www.forbes.com/sites/advisor/2012/11/05/how-is-the-maximum-social-security-benefit-calculated/?sh=56b4e2a26408
Thank you. It’s astounding how fiendishly complicated SS is.
I’m not sure why you would have seen an increase greater than the COLA. I found an article on the SS website that lists three reasons shy your benefit could up in any year.
“Once you begin receiving benefits, there are three common ways benefit checks can increase: a cost of living adjustment (COLA); additional work; or an adjustment at full retirement age if you received reduced benefits and exceeded the earnings limit.“
https://blog.ssa.gov/three-common-ways-your-social-security-payment-can-grow-after-retirement/
Do any of these apply?
Could it actually be a reduction in some deduction like Part D?
No deductions yet. Still on company’s health plan. Just Medicare A which is automatic and “free” when one takes SS.
Perhaps I over paid into it. I had a side gig for awhile and had SS deducted as well as from full time employment. Thank you again.