Social Security benefits and retirement are synonymous terms. In fact, in October 2022, the Social Security Administration (SSA) reported that over 70 million Americans collected monthly benefit payments.
But this government program provides more than merely a regular source of money for those who leave the workforce. It also offers payments to disabled people, supplemental income for eligible persons, and payouts to surviving spouses and children (much like life insurance).
Several factors influence the payments, including the duration of employment. You can decide to retire earlier, but that will lower your Social Security Earnings. Furthermore, your SSA Retirement benefit is also calculated based on:
- Lifetime Earnings
- Any adjustment or “Index” to account for changes in average wages since the year the earnings were received, which will be calculated from the 35 years you made the most money
For Social Security Disability benefits, you must have a qualifying medical condition to qualify for disability benefits. Your earned income is one factor that most people fail to take into account.
Earned income is the money you make throughout your work life and is the most crucial factor. Generally, the more you earn, the better things will be for you in the long term.
So, how does my income affect Social Security benefits? Read this article to the end to find out.
How Are Social Security Benefits Calculated?
Every year, the SSA keeps a file of your earned income and the percentage subject to Social Security taxes to determine your retirement benefits.
The higher the income earned while working and the more you contribute to the Social Security system through payroll or self-employment taxes, the more your monthly benefits will be, up to a set limit.
The limit was $4,194 per month in 2022, and for 2023 it is $4,555.
The SSA utilizes only the 35 years with the highest earnings if you have contributed to the Social Security system for more than 35 years and excludes all other years from its calculation.
But if you contributed to the system for less than 35 years, the SSA uses a value of $0 to make up for any missing years.
When you file for benefits, the SSA adjusts these earnings to account for your previous wage inflation and determine your primary insurance amount (PIA). The PIA indicates the payment you qualify for when you attain what Social Security refers to as your full retirement age (FRA).
The FRA for those who were born between 1943 and 1954 is 66. The age goes up by two months per year for those born after 1954, reaching 67 for individuals born from 1960 onwards.
Another crucial factor is the age at which you receive Social Security payments. You can receive benefits as early as age 62. But if you file for benefits before your FRA, your benefits will permanently reduce.
Inversely, if you wait until after your FRA at age 70 to receive benefits, your monthly payout increases by eight percent annually. Benefits reach their maximum at 70, and deferring further is no longer beneficial.
Note: Your Social Security benefits may be partially taxable if your income exceeds a specific threshold.
What Income Reduces Social Security Benefits?
What if my Social Security benefits and income from investments are not enough to support me? How does my income affect Social Security benefits?
You might need to explore an additional source of income, such as a part-time or freelance job. But it is crucial to understand how working while retired will affect your Social Security benefits.
The SSA may temporarily suspend some of your benefits depending on your income. That depends on the FRA stage you are in. For example:
- Your benefits are lowered by $1 for every $2 you earn over $19,560 for 2022 ($21,240 for 2023) till you hit your FRA.
- Your benefits are decreased by $1 for every $3 you earn beyond $51,960 for 2022.
- Your benefits will not reduce from the month you reach FRA.
Keep in mind that you will not lose these dollars forever. Once you hit your FRA, your Social Security benefit will increase to reflect them.
Do Unemployment and Disability Benefits Impact Social Security?
Any unemployment benefits you receive are not considered earned income by the SSA. That means it does not affect your retirement benefits, and you can collect both.
But remember that the Social Security payments you collect can affect your eligibility for unemployment benefits. Inquiring about the prerequisites for obtaining benefits from your state’s unemployment agency is advisable.
However, you will not be eligible for Social Security and federal disability benefits. Any disability benefits you get are automatically transferred to retirement benefits when you hit your FRA. Your monthly payment does not change because the amount is not adjusted.
Is Social Security Taxable?
It depends. Some of your Social Security benefits may be subject to taxation if your combined income exceeds a specific threshold.
Combined income, in this case, refers to your gross income, any nontaxable interest you may have accrued over the year, and half of your Social Security payments.
For instance, you may have to pay tax on up to 50% of your benefits if you are married and file jointly, and your combined income is between $32,000 and $44,000.
Up to 85% of your benefits can be subject to tax if your total income exceeds $44,000. These figures are $25,000 to $34,000 for those who file jointly and more than $34,000 for individual filers.
Is Social Security Based on Income?
The SSA uses the 35 years with the highest earnings in your lifetime to determine how much Social Security payment you will receive.
The agency then divides the number of months in all these years by the overall earnings. It also considers the age you opt to begin receiving payments.
Your benefits will irrevocably reduce if you retire and begin receiving Social Security benefits prematurely. It is advisable to wait until you are 70 to get an eight percent annual increase on your benefits.
Is a Pension Considered Earned Income for Social Security?
Only earned income is factored in when calculating your Social Security. That refers to salaries, wages, and other compensation from full-time, part-time, contract, freelance, or self-employed jobs.
Consequently, such income is applicable if you paid Social Security taxes through salary deductions or on your own. Pensions, annuities, interest, dividends, and other investment income are not additional revenue sources.
Bottom Line
You have put in a lot of work, are preparing for retirement, and are eager to start receiving Social Security payments.
Knowing the basics to make the most of your benefits as you wait for that monthly allowance.
These benefits are contingent on your lifetime’s 35 highest-earning years. Besides, other factors affect how much you will collect, such as your age and if you continue working.
You may prepare for retirement better if you know what to expect. So, if you are wondering, “how does my income affect Social Security benefits” Legal Giant can help.
We partner with highly skilled Social Security disability experts who can explain how your income will affect your benefits and guide you on the way forward.
Contact us at (833) 641-1650 for a free consultation.
