Social Security and You: Working seniors may get increase

I get lots of questions from working senior citizens who wonder if the Social Security payroll taxes they are paying will increase their Social Security checks. I usually flippantly say that if you are serving as a greeter at Walmart or slinging fries at McDonalds, you won’t see an increase. But if you are working at a job earning a decent wage, your Social Security checks might go up. However, as with many inquiries about Social Security benefits, the answer isn’t quite as simple as that.

To understand whether the earnings you have — and the taxes you pay — after you start getting Social Security will increase your benefits, you have to understand how Social Security retirement benefits are figured in the first place.

Simply stated, your Social Security retirement benefit is based on your average monthly income, indexed for inflation, using a 35-year base of earnings.

So, when you initially filed for Social Security, the Social Security Administration looked at your entire earnings history. Then they adjusted each year of earnings for inflation. The inflation adjustment factor depends on your year of birth and varies from one year to the next.

Here is just one example. Let’s say Mike was born in 1949. And let’s say that he made $7,000 in 1970. When figuring his Social Security benefit, SSA multiplied that $7,000 by an inflation adjustment factor of 6.58. In other words, instead of $7,000, they actually used $46,060 as his 1970 earnings when figuring his Social Security benefit.

Because there are literally thousands of these inflation factors — depending on your date of birth and the year in question — I simply cannot list them here. SSA produces a pamphlet for each year of birth (for recent retirees) that lists these inflation factors. If you’re interested, go to www.socialsecurity.gov/pubs and click on “Retirement.” Then find the publication labeled “Your Retirement Benefit — How It Is Figured” for your year of birth and click on it.

And now, back to our retirement calculation. After SSA indexes each year of earnings for inflation, they pull out your highest 35 years and add them up. Then they divide the total by 420 — that’s the number of months in 35 years —to get your average monthly inflation-adjusted income. Your Social Security benefit is a percentage of that amount. The percentage used depends on a variety of factors (explained in the publication referred to in the prior paragraph). But for the purposes of this fact sheet, we don’t need to know the precise percentage.

Suffice it to say that for most people, their Social Security retirement benefit represents roughly 40 percent of their average inflation-adjusted monthly income.

So when you are working and paying Social Security taxes after you start receiving Social Security benefits, those additional taxes you are paying will increase your monthly Social Security check IF your current earnings increase your average monthly income. In other words, IF your current annual income is higher than the lowest inflation-adjusted year of earnings used in your most recent Social Security computation, SSA will drop out that low year, add in the new higher year, recalculate your average monthly income, and then refigure your Social Security benefit.

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Here is a quick example of what I mean. Let’s go back to Mike’s case cited above. Let’s say that the $7,000 he made in 1970 was the lowest year in his current Social Security computation. And let’s further say that he is still working and made $35,000 last year. Mike assumes that because $35,000 is much higher than $7,000, he should get an increase in his Social Security checks. But remember, SSA didn’t use $7,000 in his benefit calculation. They used the inflation-adjusted amount of $46,060. Because his current earnings of $35,000 are lower than the low year of $46,060 used in his Social Security retirement computation, the additional earnings do NOT increase his average monthly income, so his Social Security benefit will not be increased.

But now let’s say that Mike made $70,000 last year. In that case, SSA would replace this current low year of $46,060 with the new higher year of $70,000, recompute his average monthly wage and refigure his benefit.

How much will he get? It depends entirely on Mike’s past earnings and his current income. Monthly benefit increases can be as little as $5, or as much as $50 or more. But on average, a year of earnings will increase your Social Security benefit by about $20 to $30 per month.

SSA has a software program that automatically tracks the earnings of working Social Security beneficiaries and refigures their benefits to see if any increase is due. It’s called the Automated Earnings Reappraisal Operation, or AERO. It generally happens between May and October of each year.

In other words, IF you are getting Social Security benefits, and IF you are working, and IF your latest earnings increase your average monthly wage and thus your Social Security benefit, you generally will see that increase by October of the following year. For example, you would get an increase for your 2014 earnings by October 2015.

SSA sends you a letter indicating the increase in your monthly benefit, which is retroactive to January of the year you get the notice.

If you are working and you don’t get such a letter announcing an increase, that probably means your earnings were simply not high enough to raise your average monthly income and thus your Social Security benefit. SSA has a very high percentage of accuracy (about 99 percent) when computing these increases.

However, if you are convinced you should have received an increase but didn’t get one, you can take your most recent W-2 form to your local Social Security office and ask them to do a manual computation.