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Understanding Social Security: Will working while receiving Social Security increase my benefit?

Dear MarketWatch,

I took benefits at 62, full retirement was 65, at 66 went back to work full time making $75,000 a year. Will my Social Security increase or can I take the option of not paying into Social Security anymore?

Dear Reader,

Social Security retirement benefits are determined (in part) by taking an average of your highest 35 years of earnings, indexed for inflation. The reference year for indexing is your age 60 year. Earnings prior to that year, when indexed, may be higher than your current income — everyone’s earnings record is different, naturally.

Read: When should you file for Social Security? Don’t be fooled by the ‘break-even’ analysis.

By continuing to work, each year your income will be added to your lifetime earnings summary. If the $75,000 that you’re earning now is a larger annual amount than one of your highest 35 years of earnings that has been used to determine your benefit up to the present. If this is the case, then whatever that lower amount was will be replaced by your recent higher amount, in this case the $75,000. Then your Social Security benefit will be recalculated using this new figure.

But don’t expect a significant change to your benefits, for two reasons:

Because we’re working with 35 years of earnings, replacing one of the previous lower years with your current income might not make much of a difference. Let’s say for example that your current Average Indexed Monthly Earnings (AIME) works out to $5,000 per month, equivalent to $60,000 per year. When your most recent income is added to your top-35 years of earnings, it replaces an indexed amount of, for example’s sake, $40,000, or $3,333 per month. This action will result in your AIME increasing to approximately $5,083 — an $83 increase.

Once your AIME has been determined, the Primary Insurance Amount (PIA) is calculated. This is determined by your year of birth — which you didn’t indicate but I’ll assume we’re talking about 1956 since you mentioned being back at work at the age of 66. Based on a birth year of 1956 and an AIME of $5,083 the PIA calculates to approximately $2,146. This is an increase of roughly $27 per month over the PIA calculated on your original $5,000 AIME.

(There’s a third one? I know I said there were two reasons but there’s actually a third.) Since you started your benefits at age 62, you’ve reduced your benefit permanently, and so that $27 PIA increase calculated in #2 above would be reduced still further. Adding in the COLAs through the years since your original filing will help, but nonetheless, it’s a further reduced figure.

On the other hand, if that $75,000 salary is not greater than one of your top-35 indexed earnings years, there will be no change to your benefit calculation with this new addition to your earnings history.

This is only a typical example. In some cases where the new income is replacing a very significantly lower amount earlier in your earnings history or perhaps a year in which you had zero income, adding this new year’s income might have a more significant impact to your benefit.

It should be noted that at no time will new years of earnings result in a reduction to your benefit calculation, unless you’re under full retirement age and the new earnings have triggered an earnings limit reduction.

The second part of your question asks if you can opt out of paying into Social Security. Unfortunately that’s not an option under today’s rules. If you have income from a W2 job or self-employment, regardless of your age or Social Security filing status, you are subject to Social Security and Medicare taxes on that income.

Readers, do you have a Social Security question? Email us at HelpMeRetire@marketwatch.com and we may use your question in a future column.

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