Social Security benefits are often synonymous with retirement. In fact, the Social Security Administration (SSA) estimated more than 53 million Americans age 65 or older received a monthly benefit check as of July 2024.
But this federal program is more than just a source of monthly income relied on by people who leave the workforce. It also provides payments to surviving spouses and children (just like life insurance), payments to disabled individuals, and supplemental income for older adults with few or no resources.
Payments are determined by the number of years you spent in the workforce and your earned income. The more you earn, and the longer you earn it, the higher your benefit amount will be.
Key Takeaways
- Your Social Security benefits are based on the income you earned during your working years.
- Your benefits are permanently reduced if you take Social Security before you reach your full retirement age.
- Your benefit amount temporarily drops if you decide to work during retirement.
- You may collect unemployment and Social Security benefits simultaneously but you can't collect both Social Security retirement and disability benefits.
- Benefits may be taxable based on your filing status and annual income.
How Social Security Benefits Are Calculated
The SSA keeps a record of your earned income every year along with the portion subject to Social Security taxes used to calculate your retirement benefits.
The more you earn while working (and the more you pay into the Social Security system through payroll or self-employment taxes), the higher your monthly benefit will be, up to a certain maximum. For 2024, that maximum is $4,873 a month. For 2023, it was $4,555.
The SSA uses your 35 highest-earning years and does not include any others in its formula. A value of $0 is substituted for any missing years.
After you apply for benefits, these earnings are adjusted or indexed to account for past wage inflation and used to calculate your primary insurance amount (PIA). The PIA reflects the benefit that you are eligible to receive once you reach what Social Security calls your full retirement age (FRA):
- For people born between 1943 and 1954, the FRA is 66.
- For people born after 1954, the FRA rises by two months annually until it reaches 67, which is the FRA for anyone born in 1960 or later.
The age at which you start collecting your Social Security benefits is another important factor. You can begin receiving retirement benefits as early as age 62. But your benefits are permanently reduced unless you wait until your FRA.
Conversely, your monthly benefit increases by 8% annually if you postpone collecting past your FRA, up to age 70. That's when benefits max out and there’s no further incentive to delay.
Your Social Security benefits may be partially taxable if your income exceeds a certain amount.
Income Can Reduce Social Security Benefits
What if you don't have enough money to live on between your Social Security benefits and investment income? You may find it necessary to find other sources of income—perhaps through a part-time job or freelance gig. If you decide to work during retirement, it's important to know that your Social Security benefits will be affected.
Some of your benefits may be temporarily withheld based on your income. This relates to which stage you're at when it comes to your FRA. For instance:
- Your benefits are reduced by $1 for every $2 you earn in excess of $22,320 for 2024 ($21,240 for 2023) until you reach your FRA.
- Your benefits are reduced by $1 for every $3 that you earn above $59,520 for 2024 ($56,520 for 2023).
- Your benefits will no longer be reduced beginning with the month when you attain FRA.
Note that these dollars are not lost forever. Your Social Security benefit increases to account for them after you reach your FRA.
Maximizing your retirement income with investments can help you achieve all of your retirement goals.
The Impact of Unemployment and Disability Benefits on Social Security
The SSA does not count any unemployment you collect as earned income. This means it doesn't impact your retirement benefits. So you may be able to collect both.
Keep in mind, though, that the Social Security checks you receive may have an effect on the unemployment benefits you're entitled to get. It's always a good idea to check with the unemployment office in your state about the rules for collecting both types of benefits.
You cannot, however, collect federal disability benefits and Social Security retirement benefits. Once you reach your FRA, any disability benefits you receive are automatically converted to retirement benefits. The amount isn't adjusted, which means your monthly benefit check remains the same.
Taxation of Social Security Benefits
Your income from Social Security may be partially taxable if your combined income exceeds a certain amount. Combined income is defined as your gross income plus any nontaxable interest that you earn during the year, plus half of your Social Security benefits.
For example, if you’re married and filing jointly and your combined income ranges from $32,000 to $44,000, then you may have to pay tax on up to 50% of your Social Security benefits. If your combined income is greater than $44,000, then up to 85% of your benefits may be taxable. Those income numbers are $25,000 to $34,000 and greater than $34,000 for single filers.
Is Social Security Based on Income?
The amount of your Social Security benefit is calculated using the 35 highest-earning years of your lifetime. The sum of those earnings is then divided by the number of months in those years. The Social Security Administration also factors in the age at which you choose to take benefits. If you retire and take Social Security early, your benefits are permanently reduced. Your benefits increase by 8% annually for each year past your FRA, up to age 70.
Is Social Security Calculated With Gross or Net Income?
Your Social Security benefits are calculated using gross income.
How Do Unemployment Benefits Impact Social Security Benefits?
Unemployment benefits don't impact Social Security benefits at all. This means you can collect both at the same time. But your Social Security may affect the amount of unemployment you receive. Be sure to check with your state agency if you're unsure.
Is a Pension Considered Earned Income for Social Security?
Only earned income is taken into consideration when it comes to your Social Security benefits. This means income earned from wages, salaries, and tips from a full-time, part-time, contract, freelance, or self-employed job. Other sources of income, such as pensions, annuities, interest, dividends, and income from other investments don't count.
The Bottom Line
Whether you've recently begun working or are well on your way in a career, it's important to know the basics of Social Security so that you can maximize the benefits you'll eventually receive. These benefits are based on the 35 highest-earning years of your lifetime.
And there are other factors that help determine the amount you'll receive, including your age and whether or not you continue to work. If you know how Social Security works and what to expect, you can make better-informed decisions about your working life and when to start your benefits.
