Many people who are out of work or could lose his or her job may worry how a period of unemployment impacts the Social Security benefits and their retirement security. The NJ Star Ledger has done a wonderful job breaking down the implications of unemployment and SS in a great question and answer piece below:
Q. I am 57 years old and I’ve worked my entire life. For the past 15 years, I have contributed the maximum amount total amount to Social Security. I believe if you earn $95,000, that’s the max for contributions in one year. Is that correct? I may soon be laid off from my job and I’m wondering how my Social Security would be impacted if I don’t get a job right away.
— Thinking early retirement
A. You’re smart to consider the long-term implications of possible unemployment.
You’re wrong about the $95,000 mark. For 2013, the maximum amount of taxable earnings is $113,700.
You’re correct that your benefits could go down if you stay unemployed for long, or if you get a lower-paying job.
“Your benefit payment is based on how much you earned during your working career,” said Everett Lo, a spokesman for Social Security. “Higher lifetime earnings result in higher benefits.”
He said if there were some years when you did not work or had low earnings, your benefit amount may be lower than if you had worked steadily.
Reed Fraasa, a certified financial planner with Highland Financial in Riverdale, describes Social Security like a pension accrual over many years.
“That means that for each year you work you receive credits toward a monthly pension for life,” he said. “The full pension is based on the Full Retirement Age benefit and that depends on your birth year.”
If you are 57 now, your FRA would be age 66 and four months.
Fraasa said you accrue your pension over your entire working life. Accrual is a technical term that means you accumulate the benefit in steps.
He said your Social Security benefit at FRA is based on the average of your earnings from the 35 highest income years. This is your Average Indexed Monthly Earnings and it follows a formula.
Social Security will take the 35 highest years of your work life and average that. You need to work for 10 years (not consecutive) with a nominal wage of a little more than $1,100 for the year to be eligible for Social Security benefits, he said.
As for paying into the system, Fraasa said the tax is shared by the worker and the employer at 6.2 percent of wages each.
If you are out of work for a few years, it will affect the AIME based on the formula. The formula SSA uses to calculate your benefit is 90 percent of the first $761 averaged indexed monthly earnings, plus 32 percent of the amount above $761 up through $4,586, plus 15 percent of any amount in excess of $4,586, he said.
“How the last nine years of your income will affect your benefit will depend on your income history,” Fraasa said. “However, since it is an average of the whole 35 years, one or two years may not have too much of an impact because after your average is above $4,586, the credit is only 15 percent of the highest average.”