Will Work After Retirement Age Increase My Social Security Benefit?

This question comes up every once in a while: Will work after retirement age increase my Social Security benefit due to the additional earnings going on my record?

The answer, as with many of these calculation-type questions, is a fully-qualified “maybe”. The amount of your earnings from work in any year may have a positive impact on your benefit – not just work after retirement age. On the downside, depending upon your benefit amount it may not be much of an increase.

The reason it’s not certain whether work after retirement age will increase your benefit is because of the nature of the calculations involved. If you’ll recall from the article on calculation of your Primary Insurance Amount (PIA) – the foundation of this calculation is a figure called your Average Indexed Monthly Earnings, or AIME. The AIME is an average of the 35 highest indexed earnings years in your working life. This is (first) calculated based upon the years between your age 20 and the year before you reach age 60.

For example, if you reach age 62 in 2015, your AIME is first calculated based on your earnings between the years 1973 and 2013. The index is based on the average of all earnings for the years prior to 2014, as compared to the average of all earnings in the year 2013. For the year 1973 in this example, the indexing figure (multiplier) is 5.9217958 – so if your earnings in 1973 were $10,000 then the indexed earnings for that year would be $59,217. Each year of earnings is multiplied by the unique index factor for your year of eligibility.

Once these figures have been determined, any years of earnings on your record at or after age 60 are added to the list as well – but earnings at or after age 60 are not indexed. These are added to the list of your lifetime earnings at face value.

Once the list of your indexed years of earnings is compiled, the amounts, indexed and face value for those after age 60, are compared and the highest 35 years are selected. This list of 35 years of earnings is then totaled and divided by 420, the number of months in 35 years – and the result is your AIME.

Armed with your AIME, you can now calculate your Primary Insurance Amount (PIA). (PIA is the foundation of all benefit calculations based on your record. PIA is the amount of benefit you would receive if you file at exactly your Full Retirement Age.)

The PIA is based upon your first year of eligibility for benefits, the year in which you reach age 62. From the year you reach age 62, income levels called bend points are defined. For our example of an individual reaching age 62 in 2015, the amount of the AIME up to $826 is multiplied by 90%; for any amount above $826 up to $4,980, the amount is multiplied by 32%; and any amount above $4,980 is multiplied by 15%. (The dollar amounts are adjusted annually, the percentages remain the same.) These three results are added together, resulting in your PIA.

So – back to the question: Will work after retirement age increase my benefit due to the additional earnings?

After the initial computation (described above), in any subsequent year that you have earnings from a Social Security-covered job, SSA takes your additional earnings and puts them into the list of years of earnings (indexed prior to age 60, face-value thereafter) and determines if the additional year’s earnings is one of the highest 35 years in your list. If this additional year replaces a lower earning year in your original list, a new AIME is calculated. Then your same bend points from your age 62 year are applied and a new PIA is developed. This recalculation is automatic, you don’t have to do anything to have the new earnings applied.

Examples

John has been working all of his adult life, from age 20 onward. He will reach age 62 in 2015. His AIME has been calculated as $5,000 this year, which results in a PIA of $2,075.70.

John continues to work past his age 62 since he has risen to the position of manager at his job and he’s just not ready to retire. John’s total earnings are $90,000 in 2015. So at the end of 2015, SSA includes the 2015 earnings in his AIME calculation. His lowest indexed earnings from prior years was $59,217 – and this amount is replaced in his “high 35” with his earnings from 2015. This results in an increase to his AIME to $5,073, and then the PIA is recalculated as $2086.60.

So – indeed, if your additional earnings are greater than one of your AIME calculation years, earning more past age 62 can have a positive impact on your benefit. However, as illustrated in the example, adding a relatively high earnings year after age 62 only increased the PIA by $10.90 per month.

Adjusting the example – if John’s earnings for 2015 are only $40,000 – this amount is less than the lowest indexed amount in his AIME list, so the AIME is not recalculated, and neither is his PIA. This is good news if you think about it. Additional earnings can only increase your benefit and cannot decrease the benefit.

If your benefit is low by comparison to the bend points for your situation as a result of low or zero earnings in one or more years used in your calculation, work after retirement age may have a larger impact.

Looking at another example, Sam (age 62 in 2015) didn’t work outside the home for the first 18 years after he reached age 20, pursuing his recording career and raising his children. From age 38 on, he dropped the recording career dream and took on a job in customer service, earning an average indexed wage over the 23 years (from age 38 to 61) of $24,000 per year. However, since Sam had many years of zero earnings in his list, his AIME is calculated as $1,314 – and his PIA is calculated as $899.40.

If Sam earns his average salary of $24,000 in 2015, his AIME will be recalculated because those earnings replace an earlier “zero” year in his list. As a result his new AIME is $1,371, and the resulting PIA is $917.70. This is an increase of $18.30 per month, almost double the amount that John’s PIA increased for earning nearly four times as much in 2015.