When I talk to various groups and organizations about Social Security, my PowerPoint presentation includes a slide with a bar graph that shows the most common sources of income for elderly Americans. As you might guess, the longest bar on the graph is Social Security. About 85 percent of seniors get a Social Security check. Other bars on the graph represent various income sources such as “Retirement benefits other than Social Security,” “Veteran’s benefits,” “Asset income,” etc.
But today, I want to talk about another bar on that graph. That bar represents “Earnings from work.” As I’ve updated that graph over the years, I’ve watched that bar grow longer and longer. When I first started using that slide, earned income was just a tiny little blip. Only about 5 percent of seniors were working. But today, it’s about 35 percent and still climbing. In other words, more and more older Americans are working.
I haven’t bothered to search for data to explain why that is happening. But I can make two guesses. One: More and more seniors need to work to supplement their Social Security check. And two: Many seniors are just more inclined to work until later in life. I can back up that latter assertion with anecdotal evidence from my 32-year career with the Social Security Administration. When I started working there in 1973, most seniors started their Social Security benefits at age 62. By the time I retired in 2005, many older folks were waiting until their full retirement age to file. And today, almost 20 years after my retirement, I can tell from my emails that waiting until 70 to file for Social Security benefits is more and more common.
But no matter when you start your benefits, seniors who continue to work after their Social Security checks start rolling in usually have two questions for me. And they go something like this: “I’m 74 years old and just went back to work. Do I still have to pay Social Security taxes even though I’m already getting Social Security benefits? And if yes, will my current earnings increase my Social Security benefit?”
The answer to the first question is “Yes.” All people who work at jobs that are covered by Social Security (and almost all jobs are) must have payroll taxes deducted from their paychecks—whether they are 16 years old or 116 years old.
The answer to the second question is “Maybe.” To understand whether the earnings you have and the taxes you pay after you start getting Social Security will increase your benefits, you have to understand how Social Security retirement benefits are figured in the first place.
Here is just one example. Let’s take a guy who was born in 1949. And let’s say that he made $7,000 in 1970. When figuring his Social Security benefit, the SSA multiplied that $7,000 by an inflation adjustment factor of 6.58. In other words, instead of $7,000, they actually used $46,060 as his 1970 earnings when figuring his Social Security benefit. (There are different inflation factors for each year of earnings.)
After the 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—that’s 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 too complex to explain here. But for the purposes of this fact sheet, we don’t need to know the precise percentage. Suffice it to say that for most people, their Social Security retirement benefit represents roughly 40 percent of their average inflation-adjusted monthly income.
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, the 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.
Here is a quick example of what I mean. Let’s go back to that guy who made $7,000 in 1970 and say that was the lowest year in his current Social Security computation. And let’s further say that he is now working and made $35,000 last year. You might assume that because $35,000 is much higher than $7,000, he should get an increase in his Social Security checks. But remember, the SSA didn’t use $7,000 in his benefit calculation. They used the inflation-adjusted amount of $46,060. Because his current earnings of $35,000 are lower than the low year of $46,060 used in his Social Security retirement computation, the additional earnings do NOT increase his average monthly income, so his Social Security benefit will not go up.
On the other hand, had his current earnings been $70,000, for example, that would increase his benefit. The SSA would replace his low year of $46,060 with the new higher year of $70,000, recompute his average monthly wage and refigure his benefit.
Now let’s say you are in a situation like that. You’re working, you’ve had a good year of earnings and you are pretty sure it should increase your Social Security check. So, what do you have to do to make that happen? The answer is: nothing.
The 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 generally happens between May and October of each year.
In other words, if you are getting Social Security benefits, and if you are working, and if your latest earnings increase your average monthly wage and thus your Social Security benefit, you generally will see that increase by October of the following year. For example, you would get an increase for your 2023 earnings by October 2024. The SSA sends you a notice indicating the increase in your monthly benefit, which is retroactive to January of the year you get the notice.
If you don’t get an increase, that means your earnings were simply not high enough to raise your average monthly income and thus your Social Security benefit.
