A Social Security myth is that the last three or five years of earnings are the only ones used to figure benefits. The Social Security Administration uses up to 35 years of highest earnings to figure retirement benefits but may use fewer years for disability and survivor benefits. If the last three years of earnings are among the highest, the SSA will include them when calculating benefits.
The SSA uses varying numbers of years to figure benefits. If a retiree received Social Security disability insurance benefits during his working years, the SSA will deduct years he could not work from the computation. The monthly benefit of a retirement beneficiary who was disabled for 10 full years would be based on his 25 highest years of earnings instead of the usual 35. The SSA computes benefits based on a participant's average monthly earnings over the required number of years.
Picking Highest Years
The SSA chooses the highest years of earnings from among all years of earnings. The highest years for Social Security purposes may not be the years of actual highest earnings. The SSA gives higher values – called indexes – to earnings from past years. This index formula equalizes earnings from past years to current years due to the effects of inflation and the rise in average earnings of all workers.
Indexing of Earnings
Indexing compares the average earnings for all workers in a "control year" with the average earnings in all prior years. The control year is the second year prior to the first year of potential eligibility. For example, if a worker becomes 62 in 2011, the control year will be 2009. A retiree turning age 62 in 2011 may have had his highest year of earnings -- $50,000 -- in 2009. Although these earnings exceed earnings of $40,000 in 1996, the index for 1996 is 1.57. His 1996 earnings are multiplied by 1.57 to find their comparative -- or "indexed"-- value of $62,800. The index for 2008, compared with the 2009 control year, is 0.9903220, making the $50,000 worth about $49,500 for benefit purposes.
Disability and Survivor Benefits
When the worker dies or becomes disabled, the SSA subtracts the year the worker became 22 from the year of death or disability. It then averages the highest earnings of that number of years, dropping out one to five of the lowest years according to age and type of benefit. The minimum to average is two years. Indexing also applies to disability and survivor benefits. For example, if a worker died or became disabled in 2010, the control year is 2008. Earnings of all other years are multiplied by their index, based on comparisons with the average earnings of workers in 2008. For example, if the control year is 2008, the index for 1996 earnings is 1.595. The SSA multiplies any earnings in 1996 by 1.595 and those are the earnings that could be used to figure benefits.
Work After Retirement
Beginning with their full retirement age -- 66 for workers born 1943-1954 -- Social Security retirees can have unlimited earnings and still receive all their benefits. These earnings could increase monthly benefits. For example, a retiree age 67 earns $65,000 in 2012. Since the retiree became 62 in 2007, the control year for earnings is 2005. If the retiree had earnings of $50,000 in 2003, the index for his 2003 earnings is 1.084, making the earnings worth $54,200. If 2003 is one of the lowest years of earnings, the SSA will replace it with the higher 2012 earnings and recalculate benefits. Any increase would be effective to Jan. 1, 2013.
- Social Security: Social Security Answers
- Social Security: Program Operations Manual System: Computing Primary Insurance Amounts
- Social Security: Indexing Factors for Earnings
- Social Security: How You Earn Credits
- Social Security: Full Retirement Age
- Social Security: Programs Operations System -- Automatic Earnings Reappraisal Operation
- USA.gov: Government Made Easy
- Social Security Online: Social Security Handbook