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Ask Rusty - Is Social Security based on last 3 years of work?

May 12, 2019

Dear Rusty: I have heard many times that what is earned the last 3 years you work before drawing Social Security benefits determines what your benefit dollar amount will be. Is this true? If not, what determines your benefit dollar amount and how is it calculated? Signed: Working Still

Dear Working: Funny how true the adage - if you say something often enough, people will believe it is true. But I’m afraid that what you’ve heard so many times about how your Social Security benefit is determined is incorrect.

While it’s true that the last 3 years you work may affect your Social Security benefit amount when you claim, those years alone are not what determine your benefit dollar amount. Rather, your benefit is determined using a formula, which includes the highest earning 35 years of your lifetime working career.

Each year in your lifetime earnings record will be adjusted for inflation, the highest earning 35 years will be selected and your “average indexed monthly earnings” (AIME) will be computed from those years. And to clarify another often-misunderstood point, you only get credit for earnings on which you paid FICA taxes, so earnings up to the annual payroll tax cap are the only earnings counted.

For most people, the latter years of their working career are the highest earning, so it’s quite likely that your last few years of earnings will be included in the 35, which are used to determine your benefit.

Once your AIME is computed from your lifetime earnings record, it is subjected to a standard formula to arrive at your Primary Insurance Amount (PIA), which is the benefit you are entitled to at your full retirement age. If you claim benefits before your full retirement age (FRA) that benefit will be reduced, by up to 30% depending upon how many months before your FRA that you claim. And if you wish to increase your benefit you can wait beyond your FRA to claim and earn delayed retirement credits of 8% per year, up to age 70.

Claiming at age 70 could get you a benefit as much as 32% more than it would be at your full retirement age (depending upon the number of months after your FRA that you claim benefits).

Unfortunately, there are many myths floating around about how your Social Security benefit is determined, and what you’ve previously heard is but one variation of those myths. But reality is as described above - the highest earning 35 years of your lifetime earnings record are used to determine your average monthly career earnings (adjusted for inflation), and that 35-year lifetime average becomes the basis for your Social Security benefit.

Anything else you hear to the contrary is simply incorrect.

Russell Gloor is a certified Social Security advisor with the Association of Mature American Citizens.