The basic concept of Social Security is pretty simple: Pay taxes during your working years, and you'll get some of that money back in the form of a monthly check in retirement. Most people have no problem understanding this, but if you ask them how the government calculates their checks, you'll probably see a lot of blank faces.
This is problematic because if you don't understand how the government calculates your benefit, you run the risk of inadvertently making choices that cost you money. Here's one example of how this might happen, and what you can do to avoid it.
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How the Social Security Administration calculates your benefit
The Social Security Administration bases your benefit on how much you've paid Social Security taxes on throughout your career, adjusted for inflation. Specifically, it looks at your 35 highest-earning years. And this is true whether you've worked for 10 years or 50.
Working longer than 35 years isn't a problem, and it could even be helpful. If you earn more currently than you did in the early years of your career on an inflation-adjusted basis, then working longer will probably boost your Social Security benefit. After you pass the 35-year mark, these lower-earning years drop out of your benefit calculation and get replaced with higher-earning years, resulting in larger checks.
But working fewer than 35 years could come back to bite you. The government doesn't adapt its benefit calculation just because you didn't work for very long. Instead, it adds in zero-income years. Even one of these can lower your monthly benefit.
For example, if you earned $50,000 per year, adjusted for inflation, for 35 years, your monthly benefit amount at your full retirement age (FRA) would be $1,980 per month, based on the current benefit formula. Had you only worked for 34 years, though, you'd only get $1,942 per month -- $38 less. Over 20 years, that amounts to a $9,120 deficit.
How to figure out how many years you've paid Social Security taxes to date
You probably have some idea of how many years you've worked in your life. But if you don't remember or you just want to make sure that you and the Social Security Administration are on the same page, create a my Social Security account.
There are a number of useful tools here, but the one you'll want to look for is your earnings record. This is a record of how much you've paid in Social Security taxes throughout your career. There should be an entry for every year you've worked so you can count them up. Make sure you have at least 35 there before retiring if you want to avoid zero-income years shrinking your benefit.
If you notice anything that looks wrong, like no income reported for a year you know you've worked, the Social Security Administration may not have received a record of your earned income that year from the IRS. It's up to you to correct it.
File a Request for Correction of Earnings Record form and submit it to the Social Security Administration, along with any tax documentation you have showing your real income for the year. The Social Security Administration will investigate your claim, and if it determines you're correct, it will update your record.
It's good practice to do this every year to ensure that, when the time comes, the government calculates your Social Security benefit based on the correct information. As explained above, even a single year of unreported income could have disastrous effects for your long-term benefit. So it's important to be vigilant and act quickly if you spot something inaccurate.
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