Q: I just turned 71 years old. I have been getting Social Security since I was 66. I was having trouble making ends meet, and I recently took a job doing some consulting work. I just got my first paycheck, and I was surprised to learn they are taking Social Security taxes out of my paycheck. I thought once you are getting Social Security, you no longer have to pay taxes into the system. Am I right?
A: You’re wrong. 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 21 years old or 71 years old.
A better question you might ask is this: Will those extra taxes I pay increase my Social Security check? The answer is that it depends. But before I explain that answer, I want to make a general comment about working senior citizens.
Occasionally, I speak about Social Security at retirement seminars. One of the slides I use in my PowerPoint presentation is a pie chart that shows the aggregate income of seniors.
Social Security is the biggest piece of that pie. When I first started using this slide (about 25 years ago), one of the smallest pieces was “earnings from a job.” But that slice of the pie has grown remarkably, especially over the past 10 years or so. It is to the point where it is now the second biggest piece, just behind Social Security.
In other words, although Social Security is still the biggest source of income for retirees, job earnings is now the second most common source of income — way more than pensions, savings or other income.
So now, back to the question: Will those taxes you pay increase the amount of your Social Security check? To understand the answer, 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.
Here is just one example. Because you just turned 71, you must have been born in 1946. And let’s say that you made $7,000 in 1970. When figuring your Social Security benefit, SSA multiplied that $7,000 by an inflation adjustment factor of 6.25. In other words, instead of $7,000, they actually used $43,750 as your 1970 earnings when figuring your Social Security benefit.
There are literally thousands of these inflation factors — depending on a person’s date of birth and the year in question . SSA produces a pamphlet for each year of birth (for recent retirees) that lists these inflation factors. If you’re interested, go to www.socialsecurity.gov/pubs and click on “Retirement.” Then find the publication labeled “Your Retirement Benefit — How It Is Figured” for your year of birth.
And now, back to the retirement calculation. 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 — 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 . For most retirees, it’s roughly 40 percent.
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.
For example, let’s say that the $7,000 you made in 1970 was the lowest year in your current Social Security computation. Let’s further say that you will make $35,000 this year. You might assume that because $35,000 is much higher than $7,000, you should get an increase in your Social Security checks. But remember, SSA didn’t use $7,000 in your benefit calculation. They used the inflation-adjusted amount of $43,750. Because your current earnings of $35,000 are lower than the low year of $43,750 used in your Social Security retirement computation, the additional earnings do not increase your average monthly income, so your Social Security benefit would not be increased.
On the other hand, if you will make $70,000, for example, that would increase your benefit. SSA would replace this current low year of $43,750 with the new higher year of $70,000, recompute your average monthly wage and refigure your benefit.
How much you will get depends entirely on your past earnings and your current income. Monthly benefit increases can be as little as about $5, or as much as $50 or more. But on average, a year of earnings will increase your 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. It’s called the Automated Earnings Reappraisal Operation. It generally happens between May and October of each year.
In other words, IF your 2017 earnings increase your average monthly wage and thus your Social Security benefit, generally you will see that increase between May and October 2018. SSA would send you a notice indicating the increase in your monthly benefit, and it would be retroactive to January 2018.