Social Security is a program that helps older folks have money when they stop working. However, you need to earn these benefits. This means you only get them if you’ve either put money into the system or are getting benefits because of your spouse’s work.
The jobs you’ve had in the past affect if you can get Social Security money and how much you can get. It’s important to know how your work history impacts the money you’ll get from Social Security. This guide will explain everything you need to understand about how your job history decides how much Social Security cash you’ll receive.
Work History and Social Security: A Vital Connection
Let’s start by the beginning: To become eligible for Social Security retirement income, you generally need to earn 40 work credits. The number of work credits required may vary slightly depending on your birth year, but 40 credits are typically needed. Work credits are earned based on your covered earnings, which are the earnings on which you pay Social Security taxes, such as income from your salary or self-employment. You can earn up to four work credits per year.
The Social Security Administration (SSA) considers your highest 35 years of earnings, after adjusting for inflation, to calculate your monthly benefits. If you have fewer than 35 years of earnings, $0 is averaged for each year you didn’t work, which can lower your benefits. The benefit formula is progressive, with lower-earning workers receiving a higher percentage of preretirement income than higher earners.
The formula involves calculating your Average Indexed Monthly Earnings (AIME) based on your adjusted earnings, which is used to determine your Primary Insurance Amount (PIA). Your PIA is adjusted based on the age at which you start receiving benefits, with reductions for claiming benefits early and increases for delaying.
Maximizing Your Social Security Benefits: To maximize your benefits, work at least 35 years to avoid $0 years in your calculation. Working more than 35 years can be beneficial because it allows you to drop some of your lowest-earning years from the calculation.
Higher earnings throughout your career result in higher benefits, but Social Security only considers earnings up to the maximum taxable income for Social Security each year. Understanding your work history and the benefit calculation formula can help you make informed decisions about when to claim Social Security benefits.
Checking Your Work History: You can access your Social Security earnings record by signing in to your Social Security account on the SSA.gov website. Ensure that your earnings history is accurate, as errors can affect your benefit calculation. If you find inaccuracies in your earnings record, contact the Social Security Administration to correct them by providing proof of your earnings.
How Does Your Work History Impact Your Social Security Earnings?
The Social Security benefit formula is calculated such that you receive benefits equal to a specific percentage of your inflation-adjusted average wage earned over the 35 years your income was the highest. The Social Security benefit formula is designed in a way that ensures you receive payments based on a certain portion of your average wage, adjusted for inflation, during the 35 years when your earnings were at their peak.
When calculating your benefits, the Social Security Administration determining your benefits follows these steps:
Looks at your entire earnings record over your career and adjusts the wages each year to account for wage growth. Only wages up to a certain maximum wage level are considered in determining your annual income. They review your complete earnings history and adjust the wages for inflation each year. However, they only include wages up to a certain maximum wage level when calculating your yearly income.
Adds up all the inflation-adjusted wages you earned in the 35 years when you earned the most. They add together all the wages, adjusted for inflation, that you earned during the 35 years when your earnings were the highest.
Divides this number by 420 (the total number of months in a 35-year work period) to calculate your average monthly wage. Then, they divide this total by 420 (the number of months in a 35-year work period) to find your average monthly wage.
The resulting number is your Average Indexed Monthly Wages, or AIME. AIME isn’t the amount you are paid in benefits, though — it’s the average earnings that the benefit formula uses to calculate your benefits. This resulting figure is known as your Average Indexed Monthly Wages, or AIME. It’s important to note that AIME isn’t the actual benefit payment; instead, it’s the average earnings used in the benefit calculation.
The Social Security Administration applies a formula to your AIME to determine your primary insurance amount (PIA). Under the Social Security benefits formula, your primary insurance amount is equal to: The Social Security Administration then uses a formula based on your AIME to calculate your primary insurance amount (PIA). According to the Social Security benefits formula, your primary insurance amount is determined as follows:
- 90% of your AIME up to a “bend point,” which is a set level of income determined in the year you turned 62.
- 32% of your AIME between the first bend point and a second bend point.
- 15% of AIME above the second bend point.
The percentage of AIME in this formula is always the same, but bend points change from year to year. The bend points help keep the Social Security formula somewhat progressive as they ensure lower earners receive a higher percentage of preretirement income in benefits. You can find the bend points for each year on the Social Security Administration’s website. While the percentage of AIME used in this formula remains constant, the bend points are adjusted annually. These bend points are crucial because they make sure the Social Security formula remains somewhat progressive, meaning that individuals with lower earnings receive a higher percentage of their pre-retirement income in benefits. You can locate the bend points for each year on the Social Security Administration’s website.
Once your primary insurance amount is determined in the year you turn 62, which is the first year you become eligible for retirement income, it’s adjusted upward each subsequent year to account for cost-of-living adjustments (COLAs). After determining your primary insurance amount at age 62, the first year you qualify for retirement benefits, it is increased each year to compensate for cost-of-living adjustments (COLAs).
COLAs are Social Security raises that occur in years when the cost of living goes up. This gives you the primary insurance amount for the current year. COLAs represent increases in Social Security payments that occur during years when the cost of living rises. This ensures that your primary insurance amount keeps pace with the current cost of living.
Social Security Benefits Are Set to Increase: This Is How Much the COLA will impact
The most recent projection for the Social Security cost-of-living adjustment (COLA) in 2024 has risen, despite a decrease in overall inflation in the United States to its lowest level in more than two years. Data released by the U.S. Bureau of Labor Statistics reveals that inflation in June 2023 increased by 3% compared to the previous year, with housing and rental costs, specifically the index for shelter, playing a substantial role in this upswing.
In light of these statistics, it is now estimated that the 2024 Social Security COLA will be 3%, an increase from the prior projection of 2.7%. The determination of the COLA relies on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which exhibited a year-over-year growth of 2.3% in June. Nevertheless, the average inflation rate over the preceding 12 months has influenced the COLA projection.