Paul Neiffer: Should I Boost Income to Increase Social Security Benefits?

I am frequently asked: “Should I maximize my earned income for a few years before retirement to increase my Social Security retirement benefits?” My answer is the typical, “It depends.”

THE CALCULATION 

First, understand how Social Security retirement benefits are calculated. You find your highest 35 years of indexed earnings based on wage inflation. After you determine your indexed earnings by year, add the 35 together and divide by 420 to arrive at the total average monthly indexed earnings (AIME). However, this is not your monthly benefit.

We now apply up to three factors to these earnings to arrive at your primary insurance amount (PIA), which will be your monthly benefit at your full retirement age (67 for most farmers). 

The first factor (or bend point) is $996. We value these earnings at 90%. Average earnings between $996 and $6,002 are valued at 32% and any average earnings over $6,002 are valued at 15% (2021 values).

Let’s assume a farmer has an AIME of $7,500 ($90,000 annual income). The first $996 is valued at 90% ($896.40). The amount be-tween $996 and $6,002 is valued at 32% ($1,601.92). The excess of $1,498 is valued at 15% ($224.70). The PIA is $2,723, which she would receive at age 67. If she retires early, PIA would be reduced, and if she waits until age 70, she will earn an extra 24% (no benefit to wait until after age 70).

EARNINGS BEFORE RETIREMENT?

For farmers who have consistently earned at least $70,000, reporting extra earnings before retirement gains little. Why? Since the val-ue is 15%, it will take the farmer 30 years to break even. 

If a farmer earns $100,000 in 2021, the maximum monthly amount of benefit the farmer could earn is $35.71 per month ($100,000 / 420 x 15%). The farmer paid in $15,300 of Social Security and Medicare tax to achieve $35.71 per month. It would take over 35 years to break even. This also assumes the farmer is replacing a zero-income year with these earnings, which rarely occurs. 

If the farmer is in the lowest “bracket,” the break-even time is about six years. In the second bracket, it increases to 17 years. If your spouse has little or no work history, the break-even periods would be decreased by about a third.

The bottom line is paying in extra Social Security taxes rarely has a great return. Review this with your advisers to see what makes sense for you.  

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Paul Neiffer is a tax principal with CLA and author of the blog, The Farm CPA. He grew up on a farm in central Washington and still resides in the state.