Another Myth That Won’t Go Away! - AMAC Foundation
In addition to helping folks with questions about how Social Security’s rules and regulations affect their personal situation, our Social Security Advisory Staff at the AMAC Foundation often takes a sidetrip into “mythland.” For example, many future retirees come to us seeking confirmation that, after claiming their benefit, continuing to work and contribute payroll tax will subsequently increase their monthly benefit. After all, someone told them it worked that way, or maybe they saw it on a social media post. In any event, we’re glad they came to us before baking this assumption into their retirement finance plans.
First, A Primer on the Benefit Calculation
Each year after your federal income tax return is filed, the IRS forwards your earnings record to the Social Security Administration (SSA), where the information is stored in your individual work record. If you had no earnings on which you paid Social Security tax (called payroll tax or, officially, FICA tax), your recorded earnings would be zero for that year.
When you reach age 62, SSA takes all of the years of earnings information in your work record and indexes them to adjust for inflation. This indexing process, which is designed to equate your historical earnings to present-day values, uses the National Average Wage Index for the year you turned 60 and compares this factor to each year of your earnings to ensure that the prior years take inflation into consideration. (The earnings between age 60 and 62, incidentally, are taken at face value.)
Here’s an example of the math: someone born in 1962 and earning $21,986 in 1992 would have their 1992 earnings multiplied by 2.78, bringing them to $61,121 in current dollars.
So, after indexing all the records in your work history, SSA then adds them together and selects the highest 35 years of indexed earnings. The highest 35 earnings figures are then added together and divided by 420—the number of months in 35 years—to produce an average monthly figure, referred to as AIME, or your Average Indexed Monthly Earnings. The AIME figure is used to calculate your monthly benefit amount at your full retirement age.
For Those Remaining in the Workforce After Claiming
Many folks remain in the workforce or rejoin after claiming their Social Security retirement benefits, some part-time, some full-time. Often, one of their beliefs, as described above, is that continuing to pay payroll tax will increase their monthly benefit over time. When asked for a confirmation on this, our typical answer is along the lines of, “maybe it will, maybe it won’t.” It all depends on the earnings after claiming benefits.
Our explanation here begins with a discussion of the indexing process described earlier and how it brings historical earnings up to present values. We then explain that their annual earnings after claiming benefits would need to exceed the lowest indexed annual earnings used in their benefit calculation for their benefit to be increased.
So, if a worker begins, or remains in, a high-wage job after claiming benefits and their current and future earnings are likely to exceed prior indexed earnings, their benefit will likely continue to grow. But, if the worker claims benefits and then decreases earnings, for example, entering a lower-paying job or shifting to part-time employment, then it is unlikely that earnings after claiming benefits would be high enough to replace the lowest value in the 35 years of indexed earnings maintained by the Social Security Administration.
Another Way an Increase Could Happen
Another possible scenario is that continuing to work after claiming benefits would allow a worker with zero earning years in their work record to replace one of those zero years with actual earnings, thereby increasing the benefit going forward.
But Don’t Fret…It’s an Automatic Process!
In any event, it’s nothing that the individual beneficiary would need to worry about tracking. Every year, after SSA processes the earnings data forwarded by the IRS, they execute a process called Automated Earnings Reappraisal Operation, or AERO, that compares the new earnings amount to the worker’s earnings record and, if the newly reported earnings are higher than any of the 35 annual indexed earnings records, the beneficiary will be notified, and the adjustment will be made retroactive to January 1. The AERO process usually takes place early in the fourth quarter of the year, and notification is only provided if the comparison results in a benefit increase.
We know this can be somewhat complicated, but know that our Social Security Advisory Service has dealt with it frequently and is available to help clarify it for you. Click here to learn more about this free-to-the-public service and how to access it.