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How Your Work History Determines How Much You Get From Social Security – The Motley Fool

Social Security is a rights program that gives the elderly an income during retirement. But the benefits still have to be earned. This means that you will only receive them if you have paid into the system or are receiving benefits on the spouse's work journal.

Your work history affects (1) whether you will be eligible for Social Security benefits at all and (2) the amount of benefits you receive. It is important to understand how your professional background affects the social security income you can expect to receive. This guide will explain everything you need to know about how your work history determines Social Security payout.

  The worker receives a paycheck.

Image Source: Getty Images.

What does your work history have to do with your social security?

Your work history determines:

  1. If you are eligible to receive Social Security benefits. You must earn a certain number of working credits during your life in order to be eligible to receive Social Security retirement income.
  2. The amount of monthly social security benefits you are entitled to receive. Social Security assesses your highest 35 years of earnings, after adjusting for inflation, to determine your monthly benefits.

Because Social Security benefits are calculated over 35 years, work across the spectrum may not result in reduced benefits, or possibly no benefits at all. But if you work and pay into the social security system throughout your career, the Social Security pension benefits are designed to replace around 40% of your retirement income. However, the benefit of social security benefits is progressive, so lower incomes receive a higher percentage of pension income than higher incomes.

Let's take a closer look at how work history affects both eligibility for Social Security benefits and the amount you earn.

How does your work history affect eligibility for Social Security benefits?

To qualify for Social Security retirement income, 40 or more work points are usually required. If you were born before 1929, you may qualify for Social Security with a smaller number of working credits.

Prior to 1978, employers reported income every three months, and you received coverage – equivalent to a work credit – if you earned $ 50 or more in each three-month period. Now employers report income once a year, and you can earn up to four work credits annually. You need some "covered earnings" to qualify for each work credit. Covered earnings are income that you pay tax on social security, such as income from your salary or from self-employed persons. Extra income for which you do not pay social security contributions, such as investment income, does not earn any working credit.

In 2019, you earn one working credit for every $ 1,360 in covered earnings. This means that you must earn at least $ 5,440 in covered earnings to receive a maximum of four credits per year. The amount of money you need to earn to get work credit changes from year to year. The table below shows the amount you needed to earn in recent years. You can also check the Social Security Administration website to find out the revenue needed for a work credit for each year back to 1978.

Year Income required for 1 work credit Income required for a maximum of 4 work credits [19659018] 2014 $ 1200 $ 4800
2015 $ 1220 $ 4880
2016 $ 1260 $ 5040
2017 $ 1300 $ 5200 [19659021] 2018 $ 1,320 $ 5,280
2019 $ 1,360 $ 5,440

Data Source: Social Security Administration.

Remember: You can earn a maximum of four work credits per year, and you need at least 40 work credits to qualify for retirement benefits. This means that you must work at least 10 years to qualify based on your work history. If your earnings are below the minimum required to earn all four working credits per year, you must work more than 10 years. It is also possible to get survivor benefits, spouse benefits or disability benefits with less than 40 work points.

Why does your work history affect your earnings from social security?

The Social Security formula is calculated so that you receive benefits that correspond to a specific percentage of inflation-adjusted average wages earned over the 35 years your income was the highest.

When you calculated your benefits, the Social Security Administration was:

  1. Looking at the entire career earnings record and adjusting wages every year to account for wage growth. Only salaries up to a certain maximum salary level are considered when determining your annual income.
  2. Adds up all the inflation-adjusted wages you earned in the 35 years you earned the most.
  3. Divide this number by 420 (the total number of months in a 35-year work period) to calculate your average monthly salary.

The resulting number is your average indexed monthly salaries, or AIME. However, AIME is not the amount you receive in benefits – it is the average income that the benefit formula uses to calculate your benefits. The Social Security Administration uses a formula at AIME to determine your primary insurance amount (PIA). Under the Social Security benefit formula, your primary insurance amount is equal to:

  • 90% of the AIME up to a "bend point", which is a fixed income level determined in the year you filled 62
  • 32% of your AIME between that first inflection point and a second inflection point
  • 15% of AIME above the second inflection point

The percentage of AIME in this formula is always the same, but the inflection points change from year to year. The bending points help to keep the formula for the insurance somewhat progressive as they ensure that lower income receives a higher percentage of pension income in benefits. You can find the inflection points for each year on the Social Security Administration's website.

When your primary insurance amount is determined in the year you turn 62, which is the first year you become eligible for retirement income, it is adjusted upward each subsequent year to account for the cost of living adjustment (COLA). COLAs are security enhancements that occur in the year when the cost of living goes up. This gives you the primary insurance amount for the current year.

You receive benefits equivalent to your primary insurance amount if you retire at an age designated by law as your full retirement age (FRA). FRA is between the ages of 65 and 67 depending on your year of birth. If you claim benefits before FRA, PIA is reduced by a specific amount depending on how early your claim is. If you claim benefits after FRA, your PIA is increased by a specific amount depending on how long you delay. However, this increase stops at the age of 70, which is why many people recommend postponing retirement to 70 years, if possible.

How does your work history determine how much you get from Social Security?

Based on the way the Social Security formula works, it is how your work history can affect Social Security retirement income.

  • Higher pay over your career means you will receive a higher monthly benefit. Remember that benefits correspond to a percentage of the average salary earned during your career. If average wages are higher, the benefits are higher as a result.
  • A short work history can reduce the benefits. Working less than 35 years results in some years being recognized in $ 0 wages when average wages are determined. This lowers your average salary and thus reduces the benefits you receive. A work history with exactly 35 years of work experience will mean that every year you work is considered to determine average salary. A longer work history means that some of the lowest earning years are not averaged in. For example, if you worked 40 years, five full years with the lowest income would not be counted – increasing average.

So, how can you maximize the social security benefits you receive? Be sure to: (1) work at least 35 years so that no year is calculated on $ 0 earnings, (2) work more than 35 years so that the lowest-earning years will be spent and raise the overall average, and ( 3) Earn as much income as possible throughout your career to increase your average salary calculation.

How can I find out about my work history for social security?

The Social Security Administration keeps track of every year when you pay Social Security contributions. You can access this record by logging into your Social Security account at SSA.gov. You must create an account and confirm your identity if you do not have one. If you already have an account, you can log in with your username and password. You will be sent an email at your registered email address that contains a security code that you can enter and you must accept SSA's terms and conditions.

After you sign in, you have the opportunity to view your income entry. This is on the main page of your account and looks like this:

  Social Security website link to view result registration

Image Source: Social Security Administration.

After clicking "View Profit Record", you will see a table with three columns.

  1. The Year You Worked
  2. Your Taxable Income From Your Social Security
  3. Your Taxable Medicare Income

This Income Protocol is used by the Social Security Administration to determine the average salary earned during your career – and thus to determine the benefits you receive.

Why do my Social Security tax revenue differ from my taxable Medicare income?

For most people, taxed Social Security and taxed Medicare earnings listed on your income record will be the same. But if you earned a high income for a few years, these numbers may be different.

That's because you only pay taxes on Social Security up to a certain income each year – the salary limit for the Social Security. The salary limit can be changed every year. In 2018, it was $ 128,400; in 2019, $ 132,900. Above this limit, income for Social Security benefits is not taxed, but they are taxed for Medicare. So, for each year that your total salary exceeded the salary base, the Social Security and Medical Treatment columns will differ.

For example, let's say you made $ 150,000 in 2018. Your "taxable Medicare income" column will reflect this entire $ 150.00 amount; however, the "Social Security Taxed Income" column will report $ 128,400, as this was the salary cap for 2018.

What if Social Security does not have an accurate record of my work history?

Sometimes Social Security makes mistakes when tracking your work history. Common reasons for this include:

  • Your employer used the wrong social security number when reporting your salary
  • Your employer made a mistake when reporting your earnings
  • You changed your name and did not report the change to Social Security Administration
  • Work done using a social security number that was not yours

If your income entry is incorrect, you must correct it so that you can receive full credit for the work you did when your Social Security benefits were calculated.

To fix this, find some evidence of the money you earned but don't get credit for, such as old pay stubs, W-2 forms, or tax forms. Then contact the Social Security Office immediately at 800-772-1213. The office is open from Monday to Friday from. local time. A representative will explain the steps you need to take to get your earnings record updated so that the benefits can be accurately calculated.

How can I estimate my social security benefits based on my work history?

Estimating the benefits based on your work history is more complicated. That's because you have to adjust all the earnings for inflation.

The Social Security Administration uses the Average Pay Index (AWI) to adjust for inflation. In particular, it uses AWI in force two years before you are first eligible for Social Security benefits. You become eligible for pension benefits at the age of 62, so AWI from the year you turn 60 is used to determine how much your salary is adjusted up to account for wage growth.

If you turn 62 in 2019, AWI from 2017 is used to adjust each year's salary. Wages are adjusted based on an "indexing factor", which is calculated by dividing AWI in the year you filled 62 years of AWI in the year you earned your salary was adjusted. You then multiply this year's earnings by the indexing factor. This can be confusing, so here is an example:

  • If you turn 62 in 2019, you use AWI from 2017, when you turned 60. That AWI is $ 50,3211.89.
  • To adjust your salary from 2016, find out the indexing factor for 2016 by dividing $ 50,321.89 (AWI used for all your adjustments) by $ 48,642.15 (AWI for 2016). Your indexing factor is 1,035.
  • Multiply 1,035 times the salaries earned in 2016, since that is the year you adjust your salary. If you made $ 50,000 in 2016, multiply $ 50,000 by the index factor of 1,035 to find that index-adjusted annual salary is $ 51,750.

Every single year you worked must be determined by multiplying against this indexing factor. There is a lot of work – fortunately, the Social Security Administration has a form on its website where you can enter the year you become eligible for Social Security benefits and get the indexing factor for each year back to the year after birth. To use this form, do the following:

  • For each year on the income record, multiply the taxable Social Security salary by the indexation factor for that year to determine your average indexed salary.
  • Post your average indexed salary for the 35 years you earned the most and divide by 420 months to get your AIME.
  • Use AIME social security formula to get 90% of AIME to the first inflection point, 32% between the first and second inflection points, and 15% of the amount above the third inflection point. Remember that the inflection points used are those from the year you turn 62, and they can be found on the Social Security website.

Is there an example of how your work history determines your social security benefits?

Here is an example of how your work history can determine your social security benefits.

The table below shows the income register for someone who turned 62 in 2019. Let's call her Kelly. It shows the indexation factors that apply to each year of salary, as well as the index-adjusted salary for each year. In connection with this example, let's assume that Kelly took a break in the middle of his career and worked only 33 years – not 35 years.



Indexing Factor

Inflation Adjusted Salary


$ 13,000.00


$ 47,497.26


$ 15,000.00

3,4697903 1965] $ 51,944.85


$ 15,400.00


$ 50,852.74


$ 16,000.00


$ 49,900.64

1985 [19659096] $ 17,250.00


$ 51,600.66


$ 18,000.00


$ 52,292.08


$ 18,000.00


$ 49,157.11


$ 26,000.00


$ 56,559.37 [19659100] 1994

$ 27,100.00


$ 57,411.39

1995 [19659096] $ 28,225.00


$ 57,490.28


$ 28,225.00


$ 54,809.79


$ 29,000.00


$ 53.209.90


$ 29,500.00


$ 51,435.26


$ 30,000.00


$ 49.545.94 [19659099] 2000

$ 30,000.00


$ 46,949.63


$ 32,000.00 [19659097] 1.5285223

$ 48,912.71

$ 34,000.00

1 , 5133452

$ 51,453.74


$ 35,300.00


$ 52,146.35


$ 36,500.00


$ 51,523.81


$ 36,500.00


$ 49,705.08


$ 37,400.00


$ 48,692.63


$ 38,000.00

1 , 2454224 [19659097] $ 47,326.05


$ 40,000.00


$ 48,696.68


$ 42,000.00


$ 51,914.42 [19659099] 2010

$ 42,450.00


$ 51,259.13


$ 43,000.00


$ 50,345.76

20 12

$ 44,500.00 [19659096] 1,1353789

$ 50,524.36


$ 44,500.00


$ 49,886.74


$ 46,000.00


$ 49,800.58

2015 [19659097] $ 47,500.00


$ 49,695.59


$ 48,200.00


$ 49,864.47


$ 49,000.00 [19659096] 1,0000000

$ 49,000.00


$ 50,000.00


$ 50,000.00

Data source: Social Security Administration. Calculations by author.

If you add up all inflation-adjusted wages from this table, you get $ 1,681,404.99. Share this with 420 months (35 years of work). Keep in mind that even though Kelly only worked for 33 years, 35 years of work history is still considered, so two years of $ 0 wages are included. Based on this math, AIME for Kelly is $ 4,003.35.

Now apply the AIME formula for 2019 – the year she turned 62. The AIME bending points in effect for that year are $ 926 and $ 5,583. So the formula looks like this:

  • 90% of the first $ 926 = $ 833.40
  • 32% of the $ 4,003.35- $ 926 = $ 984.75. Since Kelly only earned $ 4,003.35 – which is below the second $ 5,583 bend – we don't have to give her credit for 15% of her income above the second bend. If Kelly had made more money, we would also have to post 15% of the income above the $ 5,583 threshold.

Kelly's primary insurance amount is $ 833.40 + $ 984.75 = $ 1,818.15. If she retired after the age of 62, the primary insurance amount would be adjusted upwards based on cost of living adjustments for the insurance made each year after the age of 62.

There is one final adjustment to make: PIA is the amount Kelly will only receive if she retires at retirement. Since she was born in 1957, her full retirement age would be 66 and 6 months. If she is 66 and 6 months old when she chooses to claim benefits, she will receive $ 1,818.15. However, if she claimed benefits earlier, her PIA would be reduced; if she retires later, it will be increased. You can learn more about how to make this final adjustment and whether it increases or decreases your PIA here.

How to Maximize Your Social Security Benefits Through Work History

Now that you understand all there is to know about the effect of work history on your social security benefits, let's summarize the most important ways you can maximize these benefits: [19659041] Qualify with work credits: You must work long enough to earn the number of work credits to qualify.

  • Work at least 35 years: The benefits are based on inflation-adjusted wages for the 35 years that you earn the most. If you work less than 35 years, the benefit will be reduced because each year of $ 0 income will reduce your average salary. Bonus: If you work more than more than 35 years, your average salary will be increased by dropping some of the lowest-earning years.
  • Earn more during your career: Okay, you probably already try this one anyway, but it's worth noting. The more money you earn during your career, the more money you will receive in retirement – but you only receive credit for income up to the maximum taxable income for Social Security each year.
  • Knowing this will help you decide when to quit working, and hopefully it will give you a better grasp of how your working life determines the income for social security benefits available in retirement years.

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