ECONOMIC CENTS: Social Security Benefits
An examination of how one accumulates Social Security benefits, and the impact of taking them earlier or later than your normal retirement age.
By Bruce Saller
WRITER
Editor’s Note: This column is informational only and is not offering financial advice. Before making any financial decisions that affect you and your Social Security benefits, you should consult a financial adviser.
To collect social security benefits based on your own earnings, you must have earned a minimum of 40 credits. One credit is accumulated for each multiple of $1810 (for 2025) earned in a year up to a maximum of 4 credits per year. So, you accumulate four credits if you earn at least $7240.
You can collect social security benefits based on your spouse’s earnings if you are married at least one year (unless you have a child); if you are divorced, you can collect if you were married at least ten years.
Benefits are calculated based on your normal retirement age, which changes depending upon the year you were born: 66 if born 1943-1954; 66 plus 2 months for each year after 1954 if born between 1955-1959; 67 if born in1960 or later.
The dollar values used to calculate your benefit are updated based upon changes in the average wage for the year (not the consumer price index). For example, if you earned $30,000 in 1985 when the average wage was $20,000, and the average wage in 2024 is $80,000, your 1985 earnings are increased to $120,000. The amount to earn a credit, the bend points (see below), and the maximum earnings subject to the payroll tax are similarly increased yearly.
Once you start collecting Social Security, your benefit is adjusted yearly by the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the 3rd quarter (Jul-Sep) compared to the previous 3rd quarter.
Your monthly benefit at full retirement age is calculated by:
Adjusting all your yearly earnings due to changes in the average wage.
Adding wages for the 35 highest earning years, using $0 for years with no wages.
Dividing the result by 420 (months in 35 years) to obtain your Average Indexed Monthly Earnings (AIME).
Add the following to determine your monthly benefit:
90% of your AIME up to $1,226 (first bend point)
32% of your AIME between $1226 and $7391(second bend point)
15% of the remaining AIME above $7391
You can collect Social Security benefits as early as age 62 or delay them up to age 70. You can delay them after age 70, but your benefit does not increase. Also, if you are still working and collect benefits before or during the year you reach full retirement age, you may have to pay back some or all of the benefits.
If you collect benefits early, your benefit is reduced 5/9 of one percent (5/9%) for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced by 5/12% per month. For example, if your normal retirement age is 67 and you collect benefits at 62, your benefit is reduced by 36 months x 5/9% + 24 months x 5/12% = 30%.
If you delay your benefits, your benefit is increased by 2/3% for each month after normal retirement age. For example, if your normal retirement age is 67 and you defer collecting benefits to 70, your benefit is increased by 36 months x 2/3% = 24%.
A spousal benefit can be claimed if you are at least 62, and your spouse is receiving a social security benefit. The spousal benefit is based on half of the spouse’s normal retirement age benefit, regardless of what age the spouse started collecting benefits. The benefit is reduced 25/36% for each month before your normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced by 5/12% per month. For example, if your normal retirement age is 67 and you collect benefits at 62, your benefit is reduced by 36 months x 25/36% + 24 months x 5/12% = 35%. So, you would receive ½ x 65% = 32.5% of your spouse’s full retirement age benefit.
If you were born after 1953, you cannot switch from a spousal benefit to your own benefit. You can switch from your benefit to a spousal benefit if your spouse retires after you. Your spousal benefit is reduced by the formula above if you started receiving benefits before full retirement age.
Deciding when to receive benefits depends on lots of factors. Here are some to keep in mind:
If you take benefits early, it takes to about age 79 before you start having less money than if you started collecting at full retirement age.
If you delay taking benefits, it takes to about age 81 before you start having more money than if you started collecting at full retirement age.
If your spouse will claim a spousal benefit:
An older spouse increases the breakeven ages in cases 1 and 2 since the spousal reduction stops sooner.
A younger spouse decreases the breakeven ages in cases 1 and 2 since the spousal reduction continues longer.
Your benefits could be reduced if you have a pension based on wages not covered by Social Security.
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