How Adding to Your Earnings Can Increase Your Social Security Benefits

Given the way that Social Security benefits are calculated, it should come as no surprise that increasing your income over time will make a difference in your eventual Social Security retirement benefits.  But how much of a difference does it make when your income is increased?

Of course, this is going to depend upon what your current income is, and how many years you have left before you’ll begin receiving benefits.  Keep in mind how your benefits are calculated – see this article for information about Computing Your Social Security Monthly Benefit – it’s based on your average monthly income over your lifetime.  Increasing that average will increase your PIA, which will in turn increase your benefit.

It’s definitely not a simple calculation to figure out what difference each increased dollar of income will have on your benefit.  Let’s walk through a few examples to see how it plays out.

Example 1

Jane, age 32, has been earning an inflation-adjusted $2,000 per month during her working career, beginning at age 22.  If her income only keeps up with inflation between now and age 62, her average indexed monthly earnings (based on today’s dollars) would equal $2,000.  Running the numbers to determine her PIA, we use these equations (2013 figures):

90% of the first $791 = $711.90
32% of the next $1,209 = $386.88

Jane’s PIA is the sum of these two numbers, $1,098.78.  This is the amount that Jane would receive at Full Retirement Age (of course, adjusted by inflation at that time). 

So what would happen if Jane can increase her average income by $100 per month, from now until she’s ready to retire?  Since she’s 32 now, she’s had 10 years at the average adjusted rate of $2,000 per month, so this means her income for the coming 30 years will need to be approximately $2,117.  Running the numbers on her new average monthly income of $2,100:

90% of the first $791 = $711.90
32% of the next $1,309 = $418.88

That brings Jane’s PIA to a total of $1,130.78, a monthly increase of $32 dollars.

What if the individual has a much lower current average income?  Intuitively you’d have to figure that the increase of $100 would have a higher percentage of impact on benefits, right?  It depends on where you are on the scale of bend points.  Let’s look at two individuals, Ed and Seth.

Example 2

Ed, age 37, has an average income of $1,000 per month over his lifetime. Seth is 42, and has a lower average income – only $500 per month.  Ed and Seth are thinking about starting a very small side-business which will bring in $100 a month each.  Neither fellow earns any more in his regular job (other than COLA increases) throughout the rest of his life.

As a result, without the side-business, Ed’s PIA at age 62 would be $778.78.  If he adds the side-business income, his average over his lifetime would increase, and so would his PIA – to $801.64, for an increase of $22.86 per month.  Seth, on the other hand, would have a PIA of $450 without the side-business.  Adding the additional $100 per month with the side-business would bring his PIA to $501.42 – an increase of $51! 

Seth’s PIA increased by a larger amount for two reasons: first of all, the $100 represents a larger percentage increase versus Ed’s increase.  Secondly, since Seth’s average income is below the first bend point ($791) both before and after the increase, a much larger share of his increased average income applies to his PIA.  In this case, the $100 increase made a difference for each, just by appreciably different amounts.

What about higher incomes?

Example 3

Anna, age 42, has averaged $6,000 per month over her lifetime.  If she continues at that rate for the coming 20 years, her PIA would equate to $2,422.46.  If Anna receives an increase in her salary of $100 per month for the coming 20 years, her PIA would increase to $2,431.03.  This increase of $8.57 per month is due to the fact that Anna’s average income is above the second bend point, so each dollar of average income increase only has a 15% impact on her PIA.

These examples illustrate how the Social Security benefit calculation benefits lower income folks at a higher rate (proportionally) than folks at higher incomes.  One particular career where this can really make a huge difference is in the service industry – particularly waiters and waitresses.  Since cash tips are voluntarily reported, waiters and waitresses typically under-report these, to their own detriment, regarding Social Security benefits.  Since quite often waiters and waitresses are on the lower end of the wage spectrum, taking credit for the dollars earned in cash tips can have a lasting improvement in future Social Security benefits!

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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