Mysteries of Social Security Retirement Benefits: Part 1--How

(As Updated May 8, 2011)

Have you ever wondered how the Social Security Administration determines your retirement benefits? If your answer is no, you pass the sanity test, because no sane person would try figure it out. But if you want to give it a whirl, here's their website: www.ssa.gov. Good luck.

On the other hand, it's worth having a basic understanding of how Social Security works so that you'll know how to maximize your benefits. Our thumb nail sketch is below.

First, to become entitled to any retirement benefits at all, you have to earn 40 Social Security credits. You get a credit by having a minimum amount of earned income (or, net earned income if you're self-employed) per year. In 2007, the amount needed for one credit is $1,000. This amount will be adjusted upward in future years in line with general increases in wages. You can earn up to 4 credits per year. So, if you have at least $4,000 in earned income (or net earned income for the self-employed) in 2007, you'll get the maximum 4 credits you can earn in a year. Accumulate 40 credits (which would take at least 10 years of working in jobs subject to Social Security taxes) and you'll cross the threshold for retirement benefits.

After you have 40 credits, more credits won't affect your retirement benefits. Social Security next looks to the 35 years of your life with the highest earnings. The amount of your benefits will be based on your earnings in those years. You can get an idea of how much your benefits will be from the annual statement you get from Social Security. (In early 2011, the Social Security Administration unwisely announced it would stop sending annual statements, and that by the end of 2011 or early 2012 it would unveil a system for citizens to get Internet access to their account information; we'll see.) Or you can use the benefits calculators at Social Security's website (www.socialsecurity.gov/planners/calculators.htm).

Why does this matter? For people who have full careers of 30 or more years, it probably doesn't matter much. But understanding Social Security retirement benefits may be important for people who work substantially less than 30 years. Let's say you started working full-time in your 20's but then took a number of years off to raise children. If you have 32 credits, you're not entitled to any benefits. Understanding that you need to earn a modest amount of earnings for a couple of years to reach the threshold for benefits is now an important piece of information. With 40 credits, you could collect a few thousand dollars a year in benefits, even you've worked only ten or twelve years. That may not sound like much, but it could total many tens of thousands of dollars (or perhaps more than $100,000) over the course of your retirement years. Not bad, considering the alternative.

Bearing in mind that Social Security calculates the amount of retirement benefits based on the 35 years of your working life with the highest income, you can boost your benefits by resuming work eventually. If you've worked a lifetime total of 10 years and have your required 40 credits, you also have 25 years of zero earnings that go into the calculation of your retirement benefits. Every year you work reduces the number of zero years. Work 10 more years, and you'll have only 15 zero years and 10 more years of positive earnings to increase your benefits. The amount of the increase will depend on how much you earn, but something is better than nothing.

We'll continue with more on the mysteries of Social Security in our next blog.


Employment benefits hint: Next time you're working with back pain, remember the accommodation that Ellen DeGeneres got. See www.wtop.com/?nid=114&sid=1092979.