Social Security: How Often Are Your Benefits Adjusted Based on Earnings?

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Although it was created to supplement pensions and retirement savings, Social Security has become the most important piece to most workers’ retirement plans. Social Security, most importantly, plays a significant role in preventing poverty among seniors.

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In light of this, it’s helpful to know how often Social Security benefits are adjusted based on earnings — and how payments are calculated.

According to the AARP, the Social Security Administration (SSA) recalculates your benefit annually, adjusting for inflation and figuring in the previous year’s income.

Income figures are received from employers via Wage and Tax Statement, or W-2, forms submitted to the (SSA). Income from self-employed workers is taken from Internal Revenue Service (IRS) tax returns.

In general, the SSA calculates benefits by taking into account how long you work, how much you make each year, the age you begin taking benefits and a cost of living adjustment (COLA) for inflation.

After analyzing consumer price index (CPI) data from the third quarter of 2021 through the third quarter of 2022, the SSA has announced that Social Security and Supplemental Security Income (SSI) beneficiaries will receive an 8.7 percent COLA for 2023.

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How Social Security Benefits Are Calculated

To qualify for Social Security benefits, you need to accumulate 40 credits, earned by paying Social Security tax on what you earn, up to a maximum of four credits per year. Most people earn their credits in 10 years of working (but there is no time limit of how long it takes to earn 40 credits). As of 2022, you must earn just over $1,500 to gain a credit — or just over $6,000 to claim all four, per the SSA.

When determining benefit eligibility of a retiree, the Social Security Administration (SSA) calculates benefits by using one’s highest 35 years of earnings as the base (average indexed monthly earnings — or AIME) and plugs it into a formula to determine your primary insurance amount (PIA), weighed by an inflation-adjusted average rate and based on claim age.

If your previous year’s income ranks in your top 35 years of earnings, Social Security will eliminate a lower-earning year in its calculation and your average monthly earnings figure will go up. If you worked fewer than 35 years, Social Security credits you with zero earnings for each year up to 35.

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The more you earn while working, the higher your monthly benefit will be, up to a maximum. For 2022 the maximum is $4,194 a month if you retire at the age of 70 — in 2023, it’s around $4,555, Forbes indicated. Per AARP, the formula used by the Social Security to calculate your PIA breaks down your average monthly wage into three parts. For 2022, PIA is determined using the sum of:

  • A full 90% of the first $1,024 of your Average Indexed Monthly Earnings (AIME),
  • plus 32% of any amount over $1,024 up to $6,172 of AIME,
  • plus 15% of any amount over $6,172.

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Just as having the minimum number of eligible earning years (and paying little into Social Security) over your career will work against your benefits, drawing on your Social Security before you reach your full retirement age (66 or 67 years old, depending on if you were born before or after 1960), will affect your benefit amount significantly when you retire.

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About the Author

David Nadelle is a freelance editor and writer based in Ottawa, Canada. After working in the energy industry for 18 years, he decided to change careers in 2016 and concentrate full-time on all aspects of writing. He recently completed a technical communication diploma and holds previous university degrees in journalism, sociology and criminology. David has covered a wide variety of financial and lifestyle topics for numerous publications and has experience copywriting for the retail industry.
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