You might think that once you start receiving Social Security benefits, you will continue to receive the same benefit amount each month for the rest of your life. However, that is not the case. There are a few different things that 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 often this happens and let you know the things that will result in a recalculation of your benefits.
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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.
First, you must calculate your average indexed monthly earnings (AIME) from your earnings record. To do this, you will need to index each year’s earnings to current values by using the indexing tables provided by the Social Security Administration (For example, if you earned $100,000 in 2010, that amount might be worth $115,000 at today’s value).
Once you have indexed each year’s earnings, you should take the 35 years with the highest earnings and find the average monthly amount. Do this by adding them together and dividing by 420. This will give you your AIME.
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 $1,115 of your AIME plus 32% of your AIME between $1,116 and $6,721 plus 15% of your AIME above $6,721.
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 any longer than that to begin your benefits. Now that you know how your benefit amount is calculated, let’s discuss the recalculation of your benefit.
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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 the way this happens in both scenarios.
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Before You Start Benefits
The Social Security Administration typically provides you with 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.
Consider a couple of examples. First, imagine that you have not yet worked for 35 years. If you have only worked for 30 years, then your benefit estimate will include five years of zero earnings in the calculation of your benefits. By continuing to work until you reach 35 years of earnings, you can significantly increase your benefit payments. Your earnings for each additional year that you work will replace the zeros in your calculation, so you could greatly increase your AIME.
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 per year for the first few years of your employment. However, if you are making $100,000 per year 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 so that you can maximize your Social Security benefits.
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After Your Benefits Have Started
It is fairly obvious to see how your benefits might be recalculated before they start, but many retirees see their benefits recalculated even after they have started. There are three main ways that can happen. Just like a recalculation before you start benefits, your benefits can also be recalculated after you have started them based on additional years of income. If you are still working after you start your benefits, the Social Security Administration can recalculate your benefits if you are earning more or are continuing to work toward 35 years of work.
Remember that continuing to work while receiving Social Security benefits will have an effect on 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.
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 rate of inflation, and it will 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 as a result of the cost-of-living adjustment.
Lastly, even if you receive spousal benefits 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. For survivor benefits, you will typically only see those 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 a recalculation of their benefits will occur. There are actually two different recalculations that could occur. 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 error. However, you should know that this situation is quite rare and does not happen often.
A recalculation, on the other hand, occurs every year. Recalculations as a result of 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.
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Do Benefit Recalculations Occur Automatically?
Typically, yes, benefit recalculations occur automatically. As long as you are paying your Social Security taxes properly, the Social Security Administration should receive a copy of your earnings record each year. 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 are only working part-time and earning a small amount of money, it is not likely to increase your benefits. However, if you are earning a significant amount of money, you can expect that your benefit will increase.
If you suspect that your benefit amount should have increased, but you 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 make sure that they received your latest earnings.
COLA recalculations also 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 prior to the year in which the adjustment takes effect.
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How Social Security Cost-Of-Living Adjustments Are Calculated
So, just how is the Social Security increase calculated each year? The process is fairly straightforward. They use the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate 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 last year, in which there was a COLA increase.
If there is an increase in the CPI-W, then the COLA increase will see 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 as a result of the COLA.
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The Bottom Line
Just because you rely on Social Security for your retirement income doesn’t mean that 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 as well. 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 each year, so any decrease in your Medicare premium would lead to more money in your Social Security check.
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Frequently Asked Questions
In what month does Social Security recalculate benefits?
The month in which your Social Security recalculation occurs depends on the type of recalculation performed. The recalculation that is performed for the annual COLA usually occurs in November, and the increase will take effect the following January. However, recalculations due to additional work history usually occur as soon as the Social Security Administration receives your W-2 or tax information from the prior year. This could be as late as April or May in some cases; however, the adjustment will be retroactive to January of that year.
How long does it take for Social Security to update earnings?
Social Security usually updates earnings within a month of receiving your documentation for the year. This means that your earnings are usually updated by the end of January for employees who receive a W-2. If you are self-employed, the process might take a little longer. In some cases, it might take until April or May before Social Security updates your earnings. Any increase in your benefits as a result of additional earnings will be retroactive to January of the current year.
Do Social Security benefits go up if you continue to work?
Whether or not your benefits will increase depends on how much money you earn and how many years of earnings records you have. If you have fewer than 35 years of earnings, additional work years will certainly raise your benefit amount. 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. You should also consider any income from retirement accounts, like an IRA or 401k, in addition to your Social Security benefits.
How can you find out what your benefits will be?
You can use the Social Security benefits estimator tool to quickly and easily find out what your benefits will be. This tool allows you to estimate your future benefits based on a given retirement date. This tool will use your earnings record to estimate 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 some basic information, like your current earnings, retirement date, and date of birth, to estimate your future benefits.
Can you get a higher benefit if you retire early?
No, you cannot get a higher benefit if you retire early. Retiring early will actually lead to a lower benefit payment. You must wait until your full retirement age to start your benefits in order 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 for each month that you start your benefits early. However, you can get a higher benefit by delaying the start of your benefits.
