How Social Security can help you play catch-up on retirement

More Americans over 55 are finally getting back to work after the long recession – the strong national employment report for January released last week confirms that.
That’s good news not just for patching up household balance sheets damaged by years of lost employment and savings. But getting back to work also is likely to boost your future Social Security benefit.

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 progressive 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.

I explain how this can work in my column today at Reuters Money; you can run the numbers on your own benefit using this calculator at the Social Security website. You will need to have an annual statement of benefits from the Social Security Administration at hand, as you’ll need to plug in your earnings history and then run some what-if scenarios to see the impact on your benefits of a return to work; click here for information on how to access your statement.

Another critical decision is the timing of your filing. 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 your 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.

Playing catch-up on retirement accounts is another viable strategy – if you can swing it. If you are age 50 or older during this calendar year, you can contribute $1,000 over the normal $5,500 limit to a traditional or Roth IRA. Likewise, you can sock away $6,000 beyond the normal $18,000 employee contribution cap to a 401(k).

But it’s less likely that this will be an option for households ravaged by joblessness during the recession. Numerous studies point to more urgent financial problems for these households, such as a lack of liquid emergency savings and high levels of debt. For example, the Pew Charitable Trusts reported recently that 55 percent of American households have less than one month of income available in readily accessible savings to use in case of an emergency.

Finally: I recently interviewed Stephen C. Goss, chief actuary of the Social Security Administration, to get an under-the-hood look at how Social Security benefit amounts are calculated. That interview is running on this week, and you can listen to audio of the interview below.


  1. I have continued working after filing for Social Security at full retirement age, sixty-six in my case. For the past couple years, my benefits have risen by a few dollars a month due to “post age sixty-six” earnings. In each case, the amount of earnings was well within my top thirty-five years in earnings amount so I am guessing that is why I got the increases. My question is: In determining my increased benefit, does SSA use the same PIA formula as it did to calculate my benefit amount when I turned sixty-six?

  2. Mark Miller says:

    Victor – the PIA formula always is the same. See this page, which explains the formula:

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