A couple weeks ago, a one-time check for $90 from the Social Security Administration showed up in my checking account. I wasn’t totally sure what that was all about, but I had a pretty good idea. Today, I got a letter from the SSA telling me all about the check, and it turned out my guess was right. I’ll share more about that mystery check in a minute. But first I want to explain to my readers why I got a check first and an explanation a couple weeks later.
And by the way, I’m not alone. I’ve received quite a few emails from readers telling me that an odd amount of money from Social Security landed in their bank accounts and they were wondering what it was all about. And I told them to just be patient and wait a week or two and they’d get an explanatory letter from the SSA.
Why does it happen that way? Why does a letter of explanation come so many days late? It’s really not a great mystery. And it’s not “typical government incompetence,” as one reader told me. It’s simply that electronic fund transfers can happen almost instantaneously, whereas a physical letter takes a while to prepare and mail. In other words, once the SSA figured I was due some extra money, they pushed a few buttons and a check was on its way to my bank account. And then after those buttons were pushed, someone at the SSA had to prepare a letter explaining what was going on, then that letter had to go through the SSA’s mailroom and then to the U.S. Postal Service and finally to my mailbox. And all of that took about 10 days or so.
Over the years, some readers have remarked to me that the SSA should time the delivery of the check to coincide with the delivery of the letter. I remember many years ago, while I still worked for the SSA, being involved in meetings where that issue was discussed. And SSA officials decided that it was best to get the money out to people as fast as possible (it’s their money, after all) and live with the consequences of a delayed letter of explanation.
So anyway, what was my extra check for? Well, that’s what the rest of this column is all about. I got a little boost in my Social Security because my 2022 earnings were finally factored into my benefit formula and it turned out those earnings caused a small increase in my monthly benefit. My monthly benefit went up by about $10, and the $90 check was paying me that extra 10 bucks retroactively to January 2023.
Some seniors who continue working after they go on Social Security get an increase in their benefits, and some don’t. 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.
Simply stated, your Social Security retirement benefit is based on your average monthly income, indexed for inflation, using a 35-year base of earnings. So, when you initially filed for benefits, the Social Security Administration looked at your entire earnings history. Then they adjusted each year of earnings for inflation. The inflation adjustment factor depends on your year of birth and varies from one year to the next.
Here is just one example. Fred 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 and for different years of birth.)
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 column, 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% 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.
My case is a little different. Because I worked for the federal government almost all my life, and paid into the civil service retirement system and not Social Security, my Social Security record is filled with a lot of “zero” earnings years. So any income I have now (when I am paying into Social Security) will replace a “zero” year and slightly boost my Social Security check. But for this column, let me use a more typical example of someone who worked and paid Social Security taxes his or her whole career.
Let’s go back to Fred whom I mentioned earlier. And let’s say the $7,000 he made in 1970 was the lowest year in his current Social Security computation. And let’s further say that he made $35,000 last year. Fred 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 Fred’s 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 Fred’s Social Security benefit will not go up.
On the other hand, had Fred’s 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.
Then, like me, one day he would notice some extra money from Social Security in his bank account. And a couple weeks later, he’d get a letter telling him what I just explained to you in this column.
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