Q: I am 62 years old and really worried. My whole life, I’ve always paid the maximum into Social Security. But now these last several years before I retire, I don’t think I will quite earn a high enough salary to reach the maximum payment. I am concerned what this will do to my Social Security check. What happens if I don’t get the maximum payout?
A: I guess what they say is true: Men really do worry about the size of things whereas women usually don’t. In the 17 years I’ve been writing this column, I have probably heard from a thousand men worried that they won’t get the maximum Social Security benefit. But I have never once heard from a woman with the same concerns.
Every year, the Social Security Administration announces the so-called “maximum” Social Security retirement benefit. There is nothing special about it. The agency’s press office puts out the number only because the media cries for it. I guess that little snippet of information makes for a good news story.
That maximum benefit is $2,663 in 2015. That means that if someone is turning age 66 this year and has paid taxes on maximum Social Security-covered earnings for each of the last 35 years, he or she will get $2,663 effective with age 66.
But there is nothing special about getting that maximum benefit. It’s not like you get a bonus from the government if you pay the maximum Social Security tax each year. Your retirement benefit will be based on your highest 35 years of earnings. And as I just said, if you have 35 years of maximum earnings, you will get a maximum Social Security benefit. If you don’t, you won’t quite get the maximum, but so what?
If you have a few years of less than maximum earnings, you’ll get something darn close to that maximum rate. Your Social Security check might not be as big as the one paid to guy next door who had maximum earnings, but I must repeat: So what? Don’t worry about it!
And I must make one more important point about all this maximum benefit business. I just said that the maximum Social Security benefit this year is $2,663. But there are many people getting more than that. How can that be?
Again, that is the maximum amount payable to someone turning age 66 and retiring in 2015. But there are many people who work beyond their Social Security retirement age. And if they do so, their benefit will usually continue to grow because of all the additional earnings added to their Social Security record. How that works is explained in the answer to the next question.
Q: I took my Social Security last month at age 66. But I continue to work. I was surprised to learn that they are still withholding Social Security taxes from my paycheck. Isn’t it true that once you go on Social Security, you no longer have to pay into the system? And if I must continue to pay, will my Social Security benefits go up because of the extra taxes I’m forced to pay?
A: Everyone who works at a job covered by Social Security must have Social Security payroll taxes deducted from his or her paycheck. And you pay those taxes whether you are 20 years old or 120 years old!
To understand whether or not 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.
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 to complex to explain here. But for now, 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.
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 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. The increase shows up automatically (you don’t have to file for it) in the following year. So, for example, you will get an increase for your 2015 earnings sometime in 2016.