Tom: I am 71 and started receiving my Social Security benefits last year. My self-employment earnings for the current and past several years should replace some earlier earning years in the calculation that determines my Social Security benefits. How and when will I see an adjustment in my benefits?
MBF: The Social Security Administration reviews your earnings record each year you continue to work, regardless of your age or whether you’re currently receiving Social Security benefits.
Social Security benefits are typically calculated using your highest 35 years of indexed earnings. If your latest year of earnings turns out to be one of your highest years, SSA will automatically recalculate your benefits and pay any increase that is due. Benefits are paid in December of the following year. For example, in December 2020, you should get an increase for your 2019 earnings if those earnings raised your benefit. The increase would be retroactive to January 2020.
To compute a worker’s retirement benefit, SSA first adjusts his or her earnings to reflect the changes in general wage levels that occurred during the worker’s years of employment to ensure that future benefits reflect the general rise in the standard of living that occurred during the worker’s career.
An insured worker becomes eligible for retirement benefits at age 62. If 2021 were the year of eligibility, SSA would divide the national average wage index for 2019 by the national average wage index for each year prior to 2019 in which the worker had earnings and multiply each ratio by the worker’s earnings. This would give the indexed earnings for each year prior to 2019. SSA would use the face value of earnings in 2019 and afterward to compute the worker’s primary insurance amount, or PIA.
Benefits claimed before full retirement age are reduced below the PIA. Benefits claimed after full retirement age grow by 8% per year above the PIA up to age 70. To see how your benefits are calculated based on your age of eligibility, see the SSA’s indexing calculator (https://www.ssa.gov/oact/cola/awifactors.html). For more information on how benefits are determined see https://www.ssa.gov/pubs/EN-05-10070.pdf.
Mary Beth Franklin, a certified financial planner, is a contributing editor for InvestmentNews.
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