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Social Security retirement benefits are based on the following:
- Lifetime earnings
- Age at time of retirement
Lifetime Earnings
Higher lifetime earnings result in higher benefits. The highest 35 years are used to calculate average monthly earnings. Each year is indexed for inflation to approximate what earnings for that year would be in today’s dollars. Earnings for each year are also capped by the Social Security maximum earnings subject to Social Security tax for that year. After calculating the average indexed monthly earnings, a formula is used to determine the primary insurance amount (PIA).
Full Retirement Age — Social Security
A person reaches full retirement age as follows:
Born prior to 1938……………………………………………………………….. Age 65
Born in 1938……………………………………………………. Age 65 and 2 months
Born in 1939…………………………………………………….Age 65 and 4 months
Born in 1940…………………………………………………….Age 65 and 6 months
Born in 1941…………………………………………………….Age 65 and 8 months
Born in 1942………………………………………………….. Age 65 and 10 months
Born in 1943 through 1954…………………………………………………….. Age 66
Born in 1955…………………………………………………….Age 66 and 2 months
Born in 1956…………………………………………………….Age 66 and 4 months
Born in 1957…………………………………………………….Age 66 and 6 months
Born in 1958…………………………………………………….Age 66 and 8 months
Born in 1959………………………………………………….. Age 66 and 10 months
Born after 1959…………………………………………………………………… Age 67
Birthday on January 1. Individuals born on January 1 of any year should refer to the previous year in this chart.
Age at Time of Retirement
The amount of benefits also depends on the age when a person decides to start collecting Social Security. Full retirement age is the age at which retirement benefits equal 100% of PIA. If benefits begin prior to full retirement age, benefits are permanently reduced. If benefits begin after full retirement age, benefits are permanently increased. By delaying the age at which a person begins to receive Social Security, benefits may increase.
Early Retirement Reduced Benefits
The earliest age a person can begin receiving Social Security benefits is age 62. The following table illustrates the effect on a primary beneficiary’s benefit, and a spouse’s benefit who normally would receive 50% of the primary beneficiary’s primary insurance amount (PIA) when Social Security benefits begin at age 62:
Year of Primary’s Reduction Spouse’s Reduction
Birth Percentage Percentage
Prior to 1938…………………….20.00%………………………………25.00%
1938………………………….20.83%………………………………25.83%
1939………………………….21.67%………………………………26.67%
1940………………………….22.50%………………………………27.50%
1941………………………….23.33%………………………………28.33%
1942………………………….24.17%………………………………29.17%
1943 – 1954……………………..25.00%………………………………30.00%
1955………………………….25.83%………………………………30.83%
1956………………………….26.67%………………………………31.67%
1957………………………….27.50%………………………………32.50%
1958………………………….28.33%………………………………33.33%
1959………………………….29.17%………………………………34.17%
After 1959………………………30.00%………………………………35.00%
Taxable Social Security Benefits
A portion of a taxpayer’s Social Security benefits may be taxable. Ask your tax preparer for more information.
Please contact the Sarasota CPAs at Sterling Tax & Accounting for more information!