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 That is good news for patching up household balance sheets damaged
by years of lost employment and savings, and also for boosting
future Social Security benefits.
Social Security is a benefit you earn through work and payroll tax
contributions. One widely known way to boost your monthly benefit
amount is to work longer and delay your claiming date. But simply
getting back into the job market can help.
Your Social Security benefit is calculated using a little-understood
formula called the Primary Insurance Amount (PIA). The PIA is
determined by averaging together the 35 highest-earning years of
your career. Those lifetime earnings are then wage-indexed to make
them comparable with what workers are earning in the year you turn
60, using a formula called average indexed monthly earnings (AIME);
finally, a progressivity formula is applied that returns greater
amounts to lower-income workers (called "bend points").
But what if you are getting close to retirement age and have less
than 35 years of earnings due to joblessness during the recession?
The Social Security Administration still calculates your best 35
years. It just means that five of those years will be zeros,
reducing the average wage used to calculate your PIA.
By going back to work in any capacity, you start to replace those
zeros with years of earnings. That helps bring your average wage
figure up a bit, even if you are earning less than in your last job,
or working part time.
"Any earnings you have in a given year have the opportunity to go
into your high 35," notes Stephen C. Goss, Social Security's chief
actuary.
I ran the numbers for a an average worker (2014 income: $49,000)
born in 1953, comparing PIA levels following 40 years of full
employment with the benefit level assuming a layoff in 2009. The
fully employed worker enters retirement at age 66 (the full
retirement age) with an annual PIA of $20,148; the laid-off worker's
PIA is reduced by $924 (4.6 percent). Getting back into the labor
force in 2014, and working through 2015, would restore $720 of that
loss.
That might not sound like much, but it would total nearly $25,000 in
lifetime Social Security benefits for a female worker who lives to
age 88, assuming a 3 percent annual rate of inflation. And for
higher income workers, the differences would be greater.
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You also can continue "backfilling" your earnings if you work past
60, Goss notes. "You get credit all the way along the way. If you
happen to work up to age 70 or even beyond, we recalculate your
benefit if you have had more earnings."
The timing of your filing also is critical. You're eligible to file
for a retirement benefit as early as age 62, but that would reduce
your PIA 25 percent, a cut that would persist for the rest of your
life. Waiting until after full retirement age allows you to earn
delayed filing credits, which works out to 8 percent for each
12-month period you delay. Waiting one extra year beyond normal
retirement age would get you 108 percent of your PIA; delaying a
second year would get you 116 percent, and so on. You can earn those
credits up until the year when you turn 70, and you also will
receive any cost-of-living adjustment awarded during the intervening
years when you finally file.
Getting back to work will be a tonic for many older Americans, but
what they might not realize is that it is also a great path to
filling their retirement gap with more robust Social Security
checks.
For more from Mark Miller, see http://link.reuters.com/qyk97s
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.
Editing by Beth Pinsker and David Gregorio)
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