Ask Larry: Are Earnings After 62 Included When Social Security Calculates My PIA?

Today’s Social Security column addresses questions about how income earned after previous earnings are inflation indexed at 62 affect how benefits rates are calculated, recalculation of WEP reductions due to substantial covered earnings and the family maximum benefit. Larry Kotlikoff is a Professor of Economics at Boston University and the founder and president of Economic Security Planning, Inc.

See more Ask Larry answers here.

Have Social Security questions of your own you’d like answered? Ask Larry about Social Security here.


Are Earnings After 62 Included When Social Security Calculates My PIA?

Hi Larry, I’ve done a bunch of searching online and can’t seem to find an answer to this question. I’ve read that you take the highest 35 years of earnings that go into the AIME number that is then applied to the bend point formula to get to your PIA at 62.

Then after 62, the PIA is adjusted only by COLAs just like for people receiving benefits. Then after the PIA is COLA adjusted, your rate is decreased or increased depending on when you claim relative to full retirement age.

I’ve also read that if you have earned income that falls within your highest 35 years of earnings occurring after 62, that would change your AIME that could change your PIA.

I have not been able to find anything that explains how the PIA would be determined if say at 63 and 64 I have income that fell within my highest 35 years. Would years of income earned after 62 change the AIME that goes into the PIA formula?

MORE FOR YOU

How are the COLAs factored in? Thanks, Jimmy

Hi Jimmy, Yes earnings in the year that a person turns 63 and 64, and earnings in any other year for that matter, can be included in their top 35 earnings years and be used to calculate their Social Security retirement benefit rate.

A person’s primary insurance amount (PIA), which can first be accurately calculated effective with the year in which they reach 62, is the amount that they would receive if they start drawing their Social Security retirement benefits the month they reach full retirement age (FRA).

Social Security retirement benefit rates are based on an average of a person’s highest 35 years of Social Security covered wage-indexed earnings. Indexing converts a person’s historical annual earnings to amounts more reflective of current day dollars. For example, a person born in 1959 who earned $20,000 in 1991 would have those 1991 earnings indexed to an amount close to $50,000 when calculating their Social Security retirement benefit rate.

The reason that a person’s PIA for retirement benefits can’t be calculated until the year they reach 62 is because their past yearly earnings need to be indexed based on the average wage index (AWI) in the year they turn 60.

And those AWI amounts aren’t available until shortly before the year that a person reaches 62. Thus, PIAs and benefit rates for people reaching 62 after 2021 can only be estimated at the present time. The base PIA calculated when a person turns 62 can be recalculated after any subsequent year in which they earn more than they did in one of their previous highest 35 years of wage-indexed earnings.

And all Social Security cost of living (COLA) increases that occur after a person reaches 62 are added to their base PIA, regardless of whether or not the person has started drawing benefits. Best, Larry


Will Social Security Recalculate My WEP Reduction If I Have Additional Substantial Earnings Years?

Hi Larry, I am subject to the WEP and am drawing teacher retirement. I have 21 years of substantial covered earnings.

I wish to start my Social Security retirement benefits soon when I will be 68. I will continue to report substantial earnings for two or three more years. Will the SSA recalculate my additional years with substantial covered earnings or do I need to ask them to do so?

I know they will recalculate for a new PIA if appropriate. I understand that SSA does its recalculations to be effective in January each year. Thanks, Charles

Hi Charles, The short answer is yes. Social Security automatically recalculates Social Security retirement benefit rates to consider both additional years of earnings, and additional substantial earnings years for Windfall Elimination Provision (WEP) purposes.

It sounds like the increases in your benefit rate that would result from additional years of earnings would be twofold. Social Security retirement benefits are calculated based on an average of a person’s highest 35 years of wage-indexed Social Security covered earnings so if you have fewer than 35 such years, you’ll be replacing zero earnings years with your additional earnings.

And on top of that increase, if you have additional years of earnings that are defined as substantial for purposes of the WEP provision and if you currently have between 20 and 30 such years, then the amount of WEP reduction applied to your benefit rate would likely decrease by 5% for each additional substantial year up to 30 years. If you reach 30 substantial Social Security covered earnings years, then no WEP reduction would apply.

The only way that an additional year of substantial Social Security covered earnings might not increase your benefit rate if you currently have between 20 and 30 substantial earnings years is if the amount of your WEP reduction is being calculated based on the WEP guarantee provision.

The WEP guarantee provision limits the amount of WEP reduction to no more than 50% of the full amount of a person’s non-covered pension. The WEP guarantee normally only applies if a person’s non-covered monthly pension amount is less than roughly $800.

Bottom line, both types of increases described above should be done automatically with no action required on your part. However, such recalculations aren’t processed immediately. Social Security usually processes those types of recalculations in the fall of the year following the additional year of earnings, but any resulting rate increases are retroactive to the person’s payment for January of that year.

You may want to consider using my company’s software — Maximize My Social Security or MaxiFi Planner — to fully analyze your options so you can make informed decisions about your best strategy for maximizing your benefits and avoid unknowingly leaving money on the table. Social Security calculators provided by other companies or non-profits may provide proper suggestions if they were built with extreme care. Best, Larry


Why Didn’t My Daughter’s Benefit Rate Go Up When Her Older Sibling Turned Age 18?

Hi Larry, I’m curious as to why my daughter’s survivor’s benefits did not go up when her sister turned 18. When my oldest child turned 18, my two other children’s benefits went up. The amount they went up made it seem like they were getting the oldest kid’s check split between them.

My daughter is the youngest and now the only one collecting but why didn’t it go up when the middle kid turned 18? Thanks, Howard

Hi Howard, The maximum rate that a surviving child can be paid is equal to 75% of the deceased worker’s primary insurance amount (PIA). Up to two surviving children can always be paid their full maximum benefit rate if they are the only survivors drawing benefits on a deceased worker’s record.

So assuming that your daughter and her older sibling were the only two survivors collecting benefits, the younger child’s benefit rate didn’t go up when the older sibling stopped getting benefits because the younger child was already receiving her maximum benefit rate of 75% of the deceased worker’s PIA.

The only time that a surviving child’s benefit amount is reduced to below 75% of the worker’s PIA is if there are more than two eligible children, or at least two eligible children plus a surviving spouse drawing benefits. In that case, they must split the family maximum benefit (FMB) FMB amount that can be paid on the worker’s record.

FMBs can amount to anywhere from 150% of the deceased worker’s PIA to 187% of the deceased worker’s PIA. That’s why benefit rates for remaining eligible survivors can sometimes increase when another beneficiary stops collecting benefits. But when only two children are getting survivor benefits, there’s no increase in the youngest child’s rate when the older child stops getting benefits. Best, Larry


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