I’ve written before (and expect to write more) about the Social Security Administration, which is both the primary source of disability insurance for low-income workers and one of the lowest-cost guaranteed retirement savings vehicles available to all workers in the United States.
I want to address a few curious issues that arise with late-career Social Security contributions, since for a variety of reasons they’re handled somewhat differently than the contributions you make throughout most of your working life.
Delaying retirement versus delaying Social Security benefits
First I need to untangle two slightly different questions. In my experience personal finance journalism focuses primarily on the benefits of delaying claiming Social Security benefits. The numbers differ very slightly depending on your birth year, but the general principle is that if you claim Social Security retirement benefits prior to your full retirement age your retirement benefit (what I calculated in this post) is reduced according to the following formula:
“a benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month.”
Meanwhile if you wait to claim until after your full retirement age your retirement benefit is increased by 8% per year you delay initiating your benefit.
That’s not what I’m talking about. As opposed to delaying claiming Social Security retirement benefits, I want to address issues arising from delaying retirement, which is to say continuing to contribute to Social Security in the last decade or so of your working life.
If you have reported earnings in fewer than 35 years, continuing to work will increase your benefit
Social Security retirement benefits are calculated based on your highest-earning 35 years, including years in which you earned nothing, so the addition of earnings up to 35 years will always increase your retirement benefit since it reduces the number of zeroes dragging down your average earnings.
For very-low-income workers there is a minimum retirement benefit, but very few workers both qualify for retirement benefits and are eligible for only the minimum benefit so I’ll set that special case aside for now.
If you have reported earnings in 35 or more years, continuing to work may or may not increase your benefit
One of the most important things to know about how Social Security benefits are calculated is that they’re on the basis of your wage-inflation-adjusted earnings. While up to $118,500 in 2016 earnings are subject to Social Security taxes, that’s the inflation-adjusted (according to their calculations) value of just $39,600 in 1985 earnings (to pick the year of my birth at random).
There’s a natural intuition that late-career workers earn more money than early-career workers, and so their increased earnings should increase their average 35-year earnings and drag up their retirement benefit.
But that is only true if their increased earnings outpaced the Social Security Administration’s wage-inflation gauge.
Now, obviously many people do, in fact, earn higher inflation-adjusted wages later in life than they do earlier in life, due to experience and seniority if nothing else. The key point here is that continuing to work after receiving 35 years of credit only increases your benefit according to the inflation-adjusted difference in your income.
Suppose a late-career worker with 35 years of credited income and whose income is above the taxable maximum of $118,500 has 1985 earnings not of $39,600 but instead half that, just $19,800. Using Social Security’s inflation adjustment, that works out to $56,628 in 2015 dollars. An additional year of crediting $118,500 in earnings to Social Security will definitely increase the worker’s retirement benefit, but by a fairly modest amount. To calculate it, deduct the annuity purchased by the $56,628 “rolled off” the worker’s earning history and add back the annuity purchased by the $118,500 added to the worker’s earning history (this exercise is left to the reader).
If you like your Social Security retirement benefit, you can keep it
Obviously most people treat their Social Security retirement benefit as something that happens to them. You work all your life, then you decide whether to start claiming at 62, at your full retirement age, or at age 70.
But late-career people who have already accumulated 35 years of Social Security earnings credit have other choices. They can keep working in their current profession and, if their wage-inflation-adjusted income is higher than their lowest lifetime earning year, marginally increase their retirement benefit.
Or they can do something else. This blog is independently financed, with an emphasis on independence. If your domestic labor income isn’t earning you a higher old-age pension, maybe you should consider something else. Start a business, travel, make a difference in the world. Your Social Security benefits will be waiting for you.
Very good summary. The thing they really don’t tell you when considering when to start is the tax situation. I started day I was old enough. Calculated I would have to live to 84 to come out ahead by waiting. And I could just invest the money, , make more than I would increase SS payments. That was very true, but I continued to work couple years, good income and much of SS money was taxed. You can’t stop drawing once start, so I haves wanted to calculate if I came out ahead. One thing that does help is death of a spouse who was high earner!
“Your social security will be waiting for you”. Perhaps – but be prepared to only get a fraction of planned bennies since SS will be broke in a decade or so. I doubt current administration can be expected to tackle the problem, because we need more gunz to make America great again. ‘More guns, less butter!’
My only solace is that Trump voters will be disproportionately affected. (Old, low income, badly educated and in ill-health).
But with all those soon-to-return high-paying coal jobs, who needs retirement income anyway? Most will be dead before they reach full retirement. Maybe that’s Trump’s genius way of ensuring SS stays solvent?
We need an app which let’s the user click on an item they’re reading and move it to a separate place. Maybe call it “The Not Everything is About Politics and Trump-Back to Life” app.
The app is free but it takes up a lot of storage in your mind.
Few people put any value on the longevity value of SS benefits.
One way to view all this is how do I get the most total dollars out of SS in my situation. Thus the focus on ‘breaking even’, and similar asset accumulation goals. By definition, this means you want the highest cumulative distributions from SS you can get regardless of who gets to spend the money. Put another way, if someone delays benefits until 70 and then dies at 80, they might think they had ‘broken even’ in total cash received with what they would have had by starting benefits younger (which would be true) and thus and not met their goal.
But if I die at 80 with these same facts, I will have met my goal because my goal is not total distributions based. My goal is to get the most from SS each year I am alive. I don’t need SS benefits during my 62-70 years, and while taking them then would likely increase my total lifetime distributions if I die young, what if I don’t die young? Living to 85 is not rare any more, and many go beyond that, some way beyond. By not starting SS until 70, my benefits per year go up 8% for each year I wait. So when I’m 90, if milk is $10 a quart, I have those higher benefits to cushion my costs.
However, Sam you say, what if you don’t live so long? So what-I’m dead!
Also-To poster Mom above: I know at one time you could stop receiving benefits after starting, repay what you have already received and bump benefits to a higher level. I am not sure about that now as I think they changed some of the rules because people were juicing the system.
To clarify, social security benefits are not “available to all workers in the United States .” Most notably excluded are teachers and other public servants in states like California, Texas, Illinois, Ohio, Massachusetts and Connecticut, among others. These folks may have paid into Social Security system before they started working to help do the things that need to get done, but they’ll be denied their entitlements.
For SSDI, the look back period is not 35 years, but the 10 most recent years, so there are some sad cases.
Pawtim,
Yes that’s right some public employees don’t participate in Social Security. Presumably they know who they are.
—Indy
I think many of them don’t know, and are unpleasantly surprised when they get injured or near retirement ago.
Really? Most people know when they see or don’t see 6.2% deducted out of their check, it is not an insignificant amount, and everyone has to sign paperwork stating that they are subject to the WEP. Many government employers actually advertise the lack of social security to keep 6.2% more of their check. Also, normally agencies administer their own long term disability plans for those who are disabled while employed.
I don’t pay into Social Security from my government job but I still earn some credit from consulting work. I am going to be subject to the WEP regardless so my goal is, through side jobs and self employment, to earn a Social Security benefit the equivalent of the Medicare premium to take advantage of the hold harmless provision in law and freeze Medicare premiums to the age 65 rate permanently. At the 40% modified low income rate under the WEP, this means roughly $4,000 in income a year in today’s dollars on average for 35 years to earn about $110 a month in benefit. https://www.ssa.gov/pubs/EN-05-10045.pdf
Explaining how to calculate ones current 35 year average adjusted wage to see where you currently stand would make this article useful. All we have now is the concept.
Ralph,
You have to follow the hyperlink to find the formulas for adjusting your wages for inflation: https://www.ssa.gov/pubs/EN-05-10070.pdf
—Indy
There are three rates where you wages are credited to your benefits, 90%, 32% and 15%. The points where your shift from one rate to another is called a bend point, and there are two of them (from 90 to 32 and from 32 to 15).
Once you get past the second bend point the increase in your contribution is very modest. Under the current formula the bend points are reached based on cumulative wages. So max earning years can sop up some low earning years in terms of crediting your benefit. Or at least that is my observation.
I play around with the calculator on the website and show you hit the second bend point at around 18-20 years of cumulative max earning. Based on that, if I quit now (at 44), I’d have about 68% of my possible max benefit of working to 67 (where I would then have 35 years of max wages). If I work to 50 I will be at 79% of that max (with 33 years of employment, so two zero years in there, with 22 max years, 3 years at more than 75% of max and the remaining 8 years at negligible rates). The point of looking at this for me is that past the second bend point your wages credit at 15% and the impact on your total benefit is minimal. So when I have the funds to retire early, SS benefits won’t be a deciding factor.
I firmly believe SS will be around in some form when I retire. Too many people rely on it and we won’t starve the elderly. Medicare scares me way more (and has the potential to eat my SS benefit).
Sesq,
That’s an interesting way of looking at it, I hadn’t thought of it that way. Thanks for sharing your thoughts!
—Indy
Using this link to the SSN calculations (https://www.ssa.gov/pubs/EN-05-10070.pdf) for someone born in 1955 working to full SSN retirement at 66yrs 2mnths, your benefit is 90% of the first $885/month in salary, then 32% up to $5536/month, This equates to a monthly benefit of $2220. For every $100/month above $5536, your SSN benefit would increase by 15% of the incremental amount, or $15/month per $100.. So someone earnings $1000 above the $5536 bend point, would receive $150 more, which is $2370/month.