Social Security Rate of Return

[kathyc2]

Well, it's rather difficult to discuss in a forum numbers in the abstract. I also think we are talking about different things. My position is that the $26 increase did not come totally from the 20K increase in earnings. Forget for a minute the tax cost of claiming it as wages and ROI, and just focus on what caused the increase.

Start by taking your highest 35 indexed years ending with 2013 wages as that is what your 2015 benefits were based on. Using that number and bend points can you calculate the same benefits mathematically as to the actual benefits you received for 2015? If so, then take your total 35 year earning through 2013 and subtract the year dropped due to 2014 wages and add in the 2014 wages without the extra 20K to see what your 2016 benefit would be using the same index and bend points as 2015- lets call this 2. Now take your lifetime total wages for the 35 years and add 20K, and calculate benefits again- let's call this 3. Then take the difference between 2 and 3. My guess is it's going to be $7, possibly $15, and this is the increase caused by the extra 20K of wages.

The difference between the $26 and the result above is due to other factors, such as updated index and bend points.

[JohnH]

Well, it's rather difficult to discuss in a forum numbers in the abstract. I also think we are talking about different things. My position is that the $26 increase did not come totally from the 20K increase in earnings. Forget for a minute the tax cost of claiming it as wages and ROI, and just focus on what caused the increase.

Start by taking your highest 35 indexed years ending with 2013 wages as that is what your 2015 benefits were based on. Using that number and bend points can you calculate the same benefits mathematically as to the actual benefits you received for 2015? If so, then take your total 35 year earning through 2013 and subtract the year dropped due to 2014 wages and add in the 2014 wages without the extra 20K to see what your 2016 benefit would be using the same index and bend points as 2015- lets call this 2. Now take your lifetime total wages for the 35 years and add 20K, and calculate benefits again- let's call this 3. Then take the difference between 2 and 3. My guess is it's going to be $7, possibly $15, and this is the increase caused by the extra 20K of wages.

The difference between the $26 and the result above is due to other factors, such as updated index and bend points.

So you're thinking that I would have gotten an increase in benefit or some sort even if my 2014 earnings were not higher than my lowest-of-35. There is no COLA, so that is the only remaining place a partial increase could have come from. That seems a little counter-intuuitive, but when I'm back in the office with time on my hands, I'll try to run the numbers without the $20K and see what the result is.

[kathyc2]

Well, I did learn something through all this. Everyone's index is set at age 60 and there is no indexing available for wages earned at 60 or later; they all have a factor of 1. Also, the bend points are set for a person in the year in which they turned 62.

If the year that was "dropped" was a year in which you were 60 or older and you had accidentally applied indexing to that year, the $26 increase makes more sense. IOW you may have increased your wage base by more than you thought. If you are in the 32% replacement range, you would have needed to replace the dropped year by one that is 34K higher for the $26 to work out.

[JohnH]

I don't have all the info here, but a quick look at my earnings record tells me that 1994 was the "dropped" year. The factor for that year was 1.74, and I did factor up the base wages for each year in the calculation to decide which year to drop.

One offsetting bit of info is that I was assuming my "dropped" year (after applying the factor) was equal to my base salary in 2014. In actuality there is still about a $5,000 difference, so the benefit increase is a result of a $25,000 increase in reported earnings. ($5,000 increase due to the higher base salary which was there anyhow, plus $20,000 for the addition to income)

I think that would mean that 20% of the percentage increase in the benefit is due to the $5,000. That results in a 5.6% return on the $3,000 rather than 7.2%. But then I didn't bother to reduce the initial cost to the actual after-tax amount either. So if I go back and reduce the initial cost from the $3,000 down to the true after-tax cost of $1,550, I'm probably back in the 7% range.

Whenever I get a chance to double check all the actual numbers, I think I'll do it both ways just for grins.

[FEDUKE404]

One more for the spin here

I decided to start taking SS benefits at my FRA (66), but rest assured I did much soul-searching beforehand. There were valid reasons NOT to start at age 62, and regardless of the possibilities discussed here I just don't care to roll the financial/lifetime dice by waiting for something closer to age 70. Personal decision, enough of that.

What I DID find interesting is that, for all intents and purposes, what I make in my remaining years of employment/Sch C/etc will likely have zero effect on my overall benefits. For many/most of my working years prior to my (main job) retirement, I maxed out on the Soc Sec earnings scale. But the real surprise is that, due to the indexing involved, the minimal pay I made while in the military (and perhaps some college summer jobs) may STILL remain included in my "best" 35 years.

As has been noted here, once you start collecting Soc Sec those numbers tend to become unavailable, but when they were (online) and at the time I actually talked to a Soc Sec representative it soon became clear that my "future" Soc Sec earnings are, for all intents and purposes, irrelevant unless I substantially increase my wage (none) or Sch C income.

Little did I know that working my donkey off during high school and college summers would have made such a permanent impact!

Just my 2¢ worth.

FE

[kathyc2]

Whenever I get a chance to double check all the actual numbers, I think I'll do it both ways just for grins.

Please do. I just can't see where a 20K increase in lifetime earnings made the 26 difference, but I may be missing something. I have too many clients, friends and relatives asking me about how SS benefits work to risk giving them the wrong info.

[Rapid Robert]

Now, what was someone saying earlier about the best-35-years-of-earnings calculation being easy?

SSA would do everyone a tremendous favor by pre-calculating the inflation-adjusted wages in, say, constant 2014 (prior year) dollars, for informational purposes only. Not only would it solve the problems mentioned in this discussion, but just think how many folks look at their inflated wages over the years and think they got ahead, when in fact their wages may have been quite stagnant in real dollars over that time.

[kathyc2]

Thanks John!

Your post prompted me to dig out my 1986 W-2's which I had known for some time that SSA was giving me incorrect credit for. Sent the info in today and I calculate it will make $16 a month more in benefits.

[JohnH]

Your post prompted me to dig out my 1986 W-2's which I had known for some time that SSA was giving me incorrect credit for. Sent the info in today and I calculate it will make $16 a month more in benefits.

I haven't forgotten that I promised to re-run the numbers and analyze the results I first reported. I also plan to re-check the spreadsheet I'm using. Still plan to do all that, but getting ready for a Thanksgiving getaway and just haven't had time to do it while in the office last week or this week. I'll eventually post an explanation. Glad to know the discussion prompted you to update your file.