What's the most important reason to review your Social Security statement? Most people would say that it is to get an estimate of their future retirement, disability and survivor benefits.
Although those estimated benefits are critical elements needed create a retirement income plan, the most crucial reason to review your Social Security statement at least once a year is to verify your earnings.
The amount of the Social Security benefits you or your family can receive depends on the amount of earnings shown on your record. Benefits are based on your top 35 years of indexed earnings. If you have fewer than 35 years of earnings, Social Security still divides by 35 to estimate your annual earnings. Consequently, several years of zero earnings will result in lower benefits.
During a recent presentation on Social Security claiming strategies, I was astounded when two different participants told me that they had discovered several years of missing earnings on their estimated benefits statements. Although they both had worked continuously as independent contractors for an international organization in the Washington, D.C., area, their records included several years with zero earnings. I told them that is a major error that needs to be addressed immediately. If your earnings are not reported correctly, it could mean a lower benefit for you and your eligible family members such as a spouse or minor dependent child.
You, your employer and Social Security share responsibility for the accuracy of your earnings record. Since you began working, Social Security has recorded your reported earnings under your name and Social Security number. The agency updates your record each time your employer — or you, if you are self-employed — reported your earnings. But you are the only person who can look at the earnings chart and know whether it is complete and accurate.
You'll see two separate columns for each year of reported earnings. The first lists your earnings up to the taxable maximum for that year. For 2015, the maximum taxable wage was $118,500. Earnings above that level do not count in the Social Security benefit formula. The second column is a more accurate reflection of earnings for higher-income workers. It lists total earnings that are subject to the 1.45% portion of the payroll tax used to finance Medicare.
Normally, you cannot correct your earnings after three years, three months and 15 days from the end of the taxable year in which your wages were paid, according to the Social Security Administration. However, you can correct your record after that length of time if you have proof of your earnings such as a tax return, a W-2 form showing wages earned and taxes paid or a pay stub. Once you have gathered your documents, contact Social Security at 800-772-1213 to begin the process of correcting your earnings record.
What are possible reasons for the error? An employer may have reported your earnings incorrectly or reported your earnings using the wrong name or Social Security number. Or perhaps you got married or divorced and changed your name but did not report the change to Social Security.
Reviewing your earnings record is reason enough to set up a personalized online account at Ssa.gov. More than 23 million people have created online accounts since Social Security began offering the digital record service in 2012. But with nearly 150 million working Americans, that means the vast majority do not have access to this vital information that includes estimated retirement benefits at age 62, full retirement age (66 for anyone born from 1943 to 1954) and at age 70, when benefits are worth the maximum due to delayed retirement credits.
A Social Security statement also includes estimated benefit amounts for your eligible family members, such as a spouse or minor dependent children under age 18, if you were to become disabled or die.
Financial advisers should ask their clients to set up online Social Security accounts and print out their statements at least once a year to include in their financial planning records. Although the Social Security Administration now sends paper statements to American workers every five years and to workers age 60 and older each year, why wait? The information is available 24/7 online. But clients must take the first step of setting up an account at Ssa.gov to provide their advisers with this crucial document.
Once clients have set up an online account, they can also use to it apply for retirement or spousal benefits, apply for Medicare and request a replacement Social Security card. If they are not yet receiving benefits, they can also use the retirement estimator that is tied to their earnings record to determine how an early retirement or returning to the workforce could affect their future benefits.
However, individuals seeking to apply for survivor benefits after the death of a spouse cannot do that online.
They still need to contact Social Security by phone at 800-772-1213.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.