By Rusty Gloor, National Social Security Advisor at the AMAC Foundation, the non-profit arm of the Association of Mature American Citizens
Dear Rusty: If a person retires at age sixty-six and continues to work full time, Social Security taxes are still taken out of his weekly paycheck. Will this taxation for Social Security contribute more to the person’s Social Security benefit, even if already retired? Signed: Curious Retiree
Dear Curious Retiree: Since its inception in 1935, Social Security has been a “pay as you go” program where contributions from those who are working are used to pay benefits to those who are collecting Social Security benefits. That remains true even if, after you start collecting Social Security, you work and pay payroll taxes into the system.
Those Social Security (SS) payroll taxes you are contributing now aren’t deposited into a personal account for you, they’re used to help pay benefits to all recipients. So, paying SS FICA payroll taxes after you start collecting benefits doesn’t affect your benefit payment. However, what might affect your benefit amount is if your current earnings from working are more than any of those in the 35 years used to originally compute your Social Security benefit when you filed.
When you apply for SS benefits, Social Security adjusts every year in your lifetime earnings record for inflation to bring those earlier earnings up to today’s dollar values. They then select the 35 highest-earning years over your entire lifetime, and from those 35 highest-earning years they develop your “Average Indexed Monthly Earnings” (AIME). Your AIME, in turn, is used to compute your Social Security benefit at your full retirement age (FRA).
Social Security examines your earnings every year after your earnings for the previous year are reported to Social Security by the IRS. After your benefits have started, and if your current earnings are higher, Social Security will replace an earlier year’s earnings with your more recent earnings and recompute your benefit, resulting in a small benefit increase (“small” because it would represent only 1/35th of the average lifetime earnings used to compute your benefit).
A key thing to remember is that each of your past year’s earnings (up until you are 60) are adjusted for inflation before computing your benefit amount. So, for example, $25,000 earned in 1990 is worth more than $60,000 in today’s dollars, and it is the inflation-adjusted amount that your current earnings would need to exceed increase in your benefit. I recently published an article on this topic which you may find helpful: www.socialsecurityreport.org/ask-rusty-does-paying-social-security-payroll-tax-increase-my-benefit/.
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 ssadvisor@amacfoundation.org.
