Money Matters

Will my earnings late in life change my Social Security benefits?

October 20, 2012 

Q. I had planned to delay taking my Social Security benefits until four years from now, when I turn 70. I hadn’t planned to quit working right away, but I’m pretty sure I’m going to be in the next round of layoffs. I asked my supervisor whether I was on the list, and she said she couldn’t say anything, but then added that it has been a pleasure working with me all these years. Since I didn’t just fall off the turnip truck, I think I better make plans to be let go. A friend of mine said I need to find another job until I’m 70 or my SS benefits will be reduced if I have zero-earning years prior to receiving benefits. I’m not sure I can find another job and would really rather not be bothered with interviewing just to be turned down or hired to do something in which I’m not interested. Will a few years of zero income have a significant impact even though I’ve worked most of my life?

Even if you had “fallen off the turnip truck,” based on your supervisor’s comments, you could probably grasp that there is a good chance you are on “the list.” It is doubtful that you need to heed the advice of your friend. You should be able to collect the same Social Security benefit at age 70 regardless of working from now until then. It would have a major impact only if these were your highest-earning years and you hadn’t reached the maximum earnings amount in prior years. You can use the retirement estimator at to figure out how much you might receive. The explanation below of how your benefit is calculated may be helpful.

Your primary insurance amount is the amount you will receive when you apply at full retirement age. This amount is used to determine how much you will receive if you apply for benefits early (prior to FRA) or delay benefits (after FRA). If someone born between 1943 and 1954 wants benefits to begin at age 62, the initial benefit will be 75 percent of PIA. As the increase in FRA continues to be phased in, the reduction for taking early benefits will gradually increase to 30 percent for those born in 1960 or later. If a person applies for benefits after FRA, the PIA is increased by 8 percent for each year that benefits are delayed up to age 70. Dollar amounts also will be affected by any cost-of-living adjustments.

SS benefits are based on the 35 years of highest earnings. Your actual earnings are adjusted or “indexed” to account for inflation and the steady rise in the cost of living. This makes earnings later in life worth less, dollar for dollar, than money earned during your early working years. Example: Maximum SS earnings in 1968 were $7,800, and the index factor is 6.94; maximum earnings in 2007 were $97,500, and the index factor is 1. If you earned the maximum in 1968, your indexed earnings for that year are $54,132. If you earned the maximum in 2007, your indexed earnings are $97,500. Once you apply the appropriate index to each of your earning years, you take the total of the highest 35 years and divide this amount by 420 months (the number of months in 35 years). This gives you your averaged indexed monthly earnings. You can find the index factors used on the Social Security web site.

Because Social Security tries to equalize benefits across income levels, the first dollar amounts earned carry more weight in the computation of benefits. Example: Compare the PIA of a taxpayer with an AIME of $7,260 with one with an AIME of half that amount, $3,630. The higher earner and that person’s employer have paid 50 percent more in Social Security taxes over their working years than the lower wage earner and that employer. But with the equalization, the lower wage earner’s PIA will be about 30 percent less, not 50 percent less, than the higher wage earner. This occurs because the AIME is divided into three “bend points.” These bend points change slightly each year with cost-of-living adjustments. Using current bend points, you would multiply the first $767 of AIME by 90 percent, multiply the amount greater than $767 but less than $4,624 by 33 percent, multiply the amount greater than any amount over $4,624 by 15 percent, and add these three amounts. The result is your PIA.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at or P.O. Box 99466, Raleigh, NC 27624

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