By Rusty Gloor, National Social Security Advisor at the AMAC Foundation, the non-profit arm of the Association of Mature American Citizens
Dear Rusty: Upon being let go in 2009 at age 65 from my full time job of 30 years, I immediately applied for Social Security for my wife and I to live on while seeking employment. Not finding anything full time, I ended up working part time for the past 9 years driving a school bus for an hourly wage. Even though my wife and I are collecting Social Security, my wages are still being taxed for it. While I don’t feel this is fair, the real rub (to me) is the fact that my Social Security payroll deductions for the past nine years do not seem to be resulting in an increase in the amount of Social Security we receive. Meanwhile, a friend, who is our age and a business owner, mentioned the amount he is taxed for SS as a sole proprietor is somehow being returned to him from time to time. Therefore, could you please explain what’s happening here and whether we are due some kind of adjustment? Signed: Working Still at 74
Dear Still Working: I cannot comment on your friend’s assertion that as a sole proprietor business owner his self-employment SS tax is somehow being “returned to him from time to time.” I can, however, tell you that the rules for business owners are the same as for those who do not own a business, except that a business owner pays both the employee and employer portion of Social Security employment taxes.
Essentially, the only way paying into Social Security now (via payroll taxes or self-employment taxes) will increase your SS benefit amount is if your income in any recent year is more than your earnings in any of the 35 highest earning years over your lifetime used to compute your SS benefit. When your Social Security benefit was originally computed, all years in your lifetime earnings history through age 59 were adjusted for inflation and the highest earning 35 years were selected to develop your “average indexed monthly earnings” (AIME). A formula was applied to your AIME to determine your “Primary Insurance Amount” or “PIA,” which is the amount you get if you claim benefits to start in the month you reach your full retirement age (FRA). If you claimed at age 65, your SS benefit was slightly reduced from your PIA because you claimed before your FRA.
Although you have been and are still working part time, and you’re paying into Social Security while doing so, your personal SS benefit will not increase unless your current earnings are more than any of those in the 35 years originally used to determine your benefit when you claimed. The inflation adjustment influences your past years’ earnings more than you might expect; for example, $50,000 earned in 1990 would require more than $125,000 in today’s earnings to change your benefit. Remember that your contributions to Social Security while you are working do not go into a personal account for you. All who work are required to pay into Social Security, and the money paid is used to help pay benefits to those already receiving Social Security. And that doesn’t change when you start collecting SS – if you continue to work you must still pay Social Security tax and the money you pay goes to help pay benefits for all recipients.
This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at email@example.com.