You might think that once you start receiving Social Security benefits, you will continue to receive the same amount each month for the rest of your life. However, that is not the case. A few different things could cause your benefit payment to increase, and you might notice an increase every year.
The Social Security Administration will usually recalculate your benefits automatically, but how often does this occur? Keep reading as we tell you how frequently this happens and let you know what will result in a recalculation of your benefits.
How Are Social Security Benefits Calculated?
Before diving into the recalculation of benefits, it helps to understand how the Social Security Administration (SSA) calculates your retirement benefits in the first place. Your monthly benefit amount is based on how much money you earned while working, how many years you worked, and your retirement age. Here is how the Social Security benefit calculation works.
Step 1: Index Earnings
First, you must calculate your average indexed monthly earnings (AIME) from your earnings record. To do this, you must index each year’s earnings to current values using the indexing tables provided by the Social Security Administration. (For example, earning $100,000 in 2010 might be worth $115,000 today.)
Step 2: Average Top 35 Earning Years
Once you have indexed each year’s earnings, you should take the 35 years with the highest earnings and find the average monthly amount. You’ll do this by adding them together and dividing by 420. This will give you your AIME.
Step 3: Apply Bend Points
After you’ve found your AIME, you will need to apply the Social Security bend points to arrive at your primary insurance amount (PIA). Your primary insurance amount will be 90% of the first $1,226 of your AIME plus 32% between $1,226 and $7,391 plus 15% above $7,391.
Step 4: Adjust for Retirement Age
Once you have your PIA, you can adjust this amount to account for your retirement age. If you wait until you reach full retirement age (FRA) to start your benefits, you will receive 100% of your AIME. Starting your benefits early will lead to a reduction in your benefits. You will see a reduction of about 0.5% for each month you start early.
You can also accrue delayed retirement credits by delaying the start of your benefits. These credits max out at age 70, so there is no need to wait longer to begin your benefits. Now that you know how your benefit amount is calculated, let’s discuss the recalculation of your benefit.
KEY TAKEAWAYS
- There are two instances when Social Security benefits get recalculated: a) before you start benefits and b) after your benefits have started.
- All Social Security recipients will receive a recalculation for COLA each year; the benefit recalculates each November, and benefits are adjusted in January.
- Social Security benefits may be recalculated automatically for those who continue working and have their earnings updated annually.
Recalculation Of Social Security Benefits
Social Security retirement benefits can be recalculated before you begin your benefits or after you start your benefits. The reasons for the recalculation can be the same, but the timing is much different. Here is how this happens in both scenarios.
Before You Start Benefits
The Social Security Administration typically provides an annual Social Security statement, even before you retire. This statement allows you to see an estimate of your future benefits. While you should receive a copy of this statement in the mail, you can also view your statement through your my Social Security account.
Most Americans are still working before they start their Social Security benefits. Because of this, your earnings each year might affect your future Social Security payment amounts. Each new year of earnings will be included in your benefit calculation, and you could see your future benefit amount change because of additional wages and earnings.
– Addition Years with Earnings
Consider a couple of examples. First, imagine that you have not yet worked for 35 years. If you have only worked for 30 years, your benefit estimate will include five years of zero earnings when calculating your benefits. You can significantly increase your benefit payments by continuing to work until you reach 35 years of earnings. Your earnings for each additional year you work will replace the zeros in your calculation, so you could significantly increase your AIME.
– Higher Earning Amounts
Similarly, if you are earning more money now than you did during your early years of working, you could also increase your benefit payments. Suppose you only made $30,000 annually for the first few years of employment. However, if you are making $100,000 annually now, your current earnings will replace lower amounts in your earnings history. These examples show the importance of working for at least 35 years and maximizing your earnings to maximize your Social Security benefits.
After Your Benefits Have Started
It is pretty obvious how your benefits might be recalculated before they start, but many retirees see their benefits recalculated even after they have begun. Increases after benefits have begun happen in three main ways.
– Working While Claiming Benefits
Just like a recalculation before you start benefits, your benefits can also be recalculated after you have begun them based on additional years of income. Suppose you are still working after you start your benefits. In that case, the Social Security Administration can recalculate your benefits if you earn more or continue to work toward 35 years of earnings.
Remember that continuing to work while receiving Social Security benefits will affect your benefit amount if you earn more than the Social Security earnings limit. If you stop working, then Social Security will recalculate your benefit amount. Similarly, once you reach full retirement age, your benefit amount will be recalculated so that you receive your full benefit amount.
– Cost-of-Living-Adjustments
Your benefits may also be recalculated because of a cost-of-living adjustment. The Social Security Administration uses the consumer price index to determine the current inflation rate and adjust your benefits based on inflation. This benefits increase is meant to help retirees, and other benefit recipients maintain the same standard of living even as the prices of goods increase. Thankfully, you will never see a reduction in your monthly payment due to the cost-of-living adjustment.
– Spousal & Survivor Adjustments
Lastly, even if you receive spousal or survivor benefits, you can still see a recalculation of your benefit amount. When it comes to spousal benefits, those are based on your spouse’s benefit amount and the age at which you file. If your spouse’s benefit gets recalculated, then your spousal benefit can also be increased.
Survivor benefits are typically only recalculated for a cost-of-living adjustment since a deceased spouse cannot increase their earnings history.
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How Often Does A Social Security Recalculation Occur?
Many beneficiaries wonder how often their benefits will be recalculated. Two different recalculations could occur.
Recomputation
The first is called a recomputation. A recomputation occurs as a result of a miscalculation or mathematical error. A recomputation can happen at any time that Social Security discovers the mistake. However, you should know that this situation is quite rare and does not happen often.
Recalculation
On the other hand, a recalculation occurs every year. Recalculations due to the COLA increase typically happen in November, and the increase will take effect in January.
Social Security recipients who are still working will also see a recalculation of their benefits each year. The Social Security Administration will examine your previous year’s W-2 earnings or self-employment income tax returns to recalculate your benefits. Although the recalculation will not occur until the Social Security Administration receives all the required documents, any increase in payment will be retroactive to January of that year.
Do Benefit Recalculations Occur Automatically?
Automatic – Earnings Record Adjustments
Typically yes, benefit recalculations occur automatically. If you pay your Social Security taxes correctly, the Social Security Administration should receive a copy of your annual earnings record. Upon receiving your income information for the previous year, they will recalculate your benefit amount to determine whether your Social Security check needs to be increased.
If you only work part-time and earn a small amount of money, it will not likely increase your benefits. However, your benefits will most likely increase if you earn a significant amount.
Automatic – COLA Adjustment
COLA recalculations occur automatically each year, and any increases associated with those adjustments take effect in January. Typically, the Social Security Administration will release the amount of the increase in October or November of the year before the year in which the adjustment takes effect.
Suspected Errors
If you suspect your benefit amount should have increased but do not see a change in your Social Security check, you should contact the Social Security Administration. You can also view your earnings report through a my Social Security account to ensure they received your latest earnings.v
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Continuing to work after beginning Social Security benefits may lead to higher benefits in the future, especially if you have less than 35 years of earnings records. Your benefits will be recalculated after your earnings are updated.
How Social Security Cost-Of-Living Adjustments Are Calculated
So, just how is the Social Security increase calculated each year? The process is pretty straightforward. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) calculates the COLA. The CPI-W is observed at the end of October of the current year, and that value is compared to the CPI-W at the end of October of the previous year.
If there is an increase in the CPI-W, the COLA increase will be the same percentage increase. For example, if the CPI-W increases by 5% from one year to the next, you can expect to see a 5% increase in your Social Security check each month.
There could be occasions where the CPI-W shows a decrease in the cost of goods and services from one year to the next. In that case, there will be no adjustment to your benefit amount. You will never see a decrease in your benefit payments due to the COLA.
The Bottom Line
Just because you rely on Social Security for your retirement income doesn’t mean you will never see a raise! The Social Security Administration recalculates your benefits each year if you have additional earnings that need to be added to your record. They also provide an annual cost-of-living adjustment that could increase your benefit payments.
These recalculations should happen automatically, but you can always contact the Social Security Administration if you expect an adjustment to your benefit amount but do not see it.
Remember that Medicare premiums are also adjusted yearly, so any decrease in your Medicare premium would increase your Social Security check.
Frequently Asked Questions
The month your Social Security recalculation occurs depends on the type of recalculation performed. The annual COLA recalculation usually happens in November, and the increase will take effect the following January.
However, recalculations due to additional work history usually occur when the Social Security Administration receives your W-2 or tax information from the prior year. In some cases, this could be as late as April or May; however, the adjustment will be retroactive to January of that year.
Social Security usually updates earnings within a month of receiving your documentation for the year. Your earnings are typically updated for employees who receive a W-2 by the end of January. If you are self-employed, the process might take a little longer.
Sometimes, it might take until April or May before Social Security updates your earnings. Any increase in your benefits due to additional earnings will be retroactive to January of the current year.
Whether or not your benefits will increase depends on how much money you earn and how many years of earnings records you have. Additional work years will undoubtedly increase your benefit if you have fewer than 35 years of earnings.
Similarly, if you are currently earning a significantly higher amount than you have earned in the past, this will also increase your benefit amount. When performing your retirement planning, you should likely seek the help of a financial advisor or personal finance expert. It would help if you also considered any income from retirement accounts, like an IRA or 401k, in addition to your Social Security benefits.
You can use the Social Security benefits estimator tool to quickly and easily determine your benefits. This tool lets you estimate your future benefits based on a given retirement date. This tool will use your earnings record to calculate your benefits.
You can also use the Social Security Quick Calculator to estimate your benefits without creating a My Social Security account. This calculator allows you to enter basic information, like your current earnings, retirement date, and date of birth, to estimate your future benefits.
No, you cannot get a higher benefit if you retire early. Retiring early will lead to a lower benefit payment. You must wait until your full retirement age to start your benefits to receive your full benefit amount.
Although you can start your benefits as early as age 62, you will see roughly a 0.5% reduction in your benefit amount each month you start your benefits early. However, you can get a higher benefit by delaying the start of your benefits.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
