Earnings after retirement

An elderly couple walks together

Q: I am 73 and still working part time. I took my Social Security at age 66. I have never seen an increase in my Social Security check, even though I am still paying into the system. What’s up?

A: 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 benefits, 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. I’m guessing you were born in 1949. And let’s say that you made $7,000 in 1970. When figuring your Social Security benefit, the 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 your 1970 earnings when figuring your Social Security benefit. (There are different inflation factors for each year of earnings.)

After the 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 too complex to explain here. But for the purposes of this column, 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% 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, the 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.

Here is a quick example of what I mean. Let’s say that the $7,000 you made in 1970 was the lowest year in your current Social Security computation. And let’s further say that you made $35,000 last year. You might assume that because $35,000 is much higher than $7,000, you should get an increase in your Social Security checks. But remember, the SSA didn’t use $7,000 in your benefit calculation. They used the inflation-adjusted amount of $46,060. Because your current earnings of $35,000 are lower than the low year of $46,060 used in your Social Security retirement computation, the additional earnings do NOT increase your average monthly income, so your Social Security benefit will not go up.

On the other hand, had your current earnings been $70,000, for example, that would increase your benefit. The SSA would replace this low year of $46,060 with the new higher year of $70,000, recompute your average monthly wage and refigure your benefit.

Now let’s say you are in a situation like that. You’re working and you’ve had a good year of earnings and you are pretty sure it should increase your Social Security check. So, what do you have to do to make that happen? The answer is: nothing.

The 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 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 2021 earnings by October 2022. The SSA sends you a notice indicating the increase in your monthly benefit, which is retroactive to January of the year you get the notice.

If you don’t get an increase, that means your earnings were simply not high enough to raise your average monthly income and thus your Social Security benefit.

Q: I am 68 years old. I get a widow’s benefit from Social Security that is about $2,400 per month. I was a stay-at-home wife and mother most of my adult life, so I don’t have my own Social Security. But now I am working trying to build up my own Social Security so I can get those extra benefits. Do you think this is a good idea?

A: If the only reason you are working is to build up your own Social Security account, then you should quit your job tomorrow. Your own Social Security retirement benefit will never reach the point where it surpasses the widow’s benefits you are already getting. Or to put that another way, when you are due two benefits, you don’t get them both. You only get the one that pays the higher rate. And again, your widow’s benefit will always pay more than your own retirement benefit ever would.

But if you are working because you need the extra income you are bringing in, or because you like your job, then of course, stick with it. Just realize that you never will see any increase in your Social Security check because of the extra Social Security taxes you are currently paying.

If you have a Social Security question, Tom Margenau has a book with all the answers. It’s called “Social Security: Simple and Smart.” Contact him at thomas.margenau@comcast.net.