4 Simple Steps to Calculating Your Social Security Benefit: Educator Edition

If you have a pension from work where you did not pay Social Security taxes, but qualified for SS benefits from other work, your SS benefits formula is NOT THE SAME AS IT IS FOR EVERYONE ELSE! Here’s how it is different…

Transcript Follows:

Hey everyone this is Devin Carroll with Social Security Intelligence.com. If you’ve qualified for a Social Security benefit from prior work, and also qualified for a pension from work where you did not pay Social Security tax, you need to understand the differences in how your Social Security benefit is going to be calculated.

There’s only four simple steps to calculating this. And it’s the same steps used for the individual who does not have this non-covered pension. So if you worked in accounting or as a nurse the same formula is used with one slight difference in it.

So I want to go through these four steps and make it make sense for you so you can do the calculation for yourself. Let’s dive in.

So the first step is that your earnings are all going to be adjusted upwards for inflation.

The second step is the calculation of your average index monthly earnings. And this is meant to give them the average amount that you earned on a monthly basis after it was adjusted for inflation.

Once they have that amount they will run that through the formula to calculate your primary insurance amount which is also your full retirement age benefit amount.

And the last step there are going to adjust it out for your filing age. So let’s dive into each of these steps and show you how you can calculate your own benefit.

Step one we’re going to adjust your earnings. So let’s take an individual who went to work in 1976 and began earning fifteen thousand dollars per year. The earnings went up every year thereafter until 1981 at which point he became a teacher in the great state of Texas. Now this could be one of the other 15 states where teachers don’t pay into Social Security.

But you’ll notice that all the way up until 2005 under the actual earnings there are zeroes. Now this doesn’t mean that he wasn’t earning anything. It just means that when the Social Security Administration looks at your historical earnings if you were in a job where you did not pay Social Security tax, they see a zero there. And then this individual goes back at age 55 into accounting or he makes $36000 a year. And you can see that there were some annual increases thereafter. And at 66 he’s finished. He’s retired and now it’s time to file for Social Security. Now when the Social Security Administration looks at these historical earnings the actual earnings aren’t that important to them. What’s much more important are the inflation adjusted earnings. They maintain a table on their website that shows how to adjust these earnings.

We’ve taken the actual earnings here and adjusted those. So the fifteen thousand dollars in earnings in 1976 would be adjusted up to sixty six thousand one hundred eighty seven dollars. That’s meant to reflect the cost of living adjustments that have happened over the years to make sure that your Social Security benefit is going to be enough to keep up with that amount. If they used your actual earnings instead your benefit amount would actually be much lower when they finish this calculation.

And you can go on through here and see I’ve actually added the adjusted earnings in here from the Social Security tables. And those are the numbers that the Social Security ministration is going to use when they’re moving to step two which is to calculate the averaged index monthly earnings.

They’ll also refer to that by its acronym name, AIME. So they’ll take all of the adjusted earnings and they will sum up the highest thirty five years. So what happens if you don’t have 35 years? Well they’ll still use 35 years in their calculation. But if you have 20 years of earnings they’re simply going to use 15 years of zeroes. And so in this case if you add up the 35 highest years you come up to an amount of $874,698 and then they divide that by 420 which is simply the number of months in 35 years because remember they are wanting to get to the average indexed monthly earnings and that gives them the amount of $2,082. That is your AIME or your averaged index monthly earnings. Once they have this amount they can move to step three which is to calculate your primary insurance amount.

Now this is where the formula gets slightly different for individuals who have a non-covered pension and are subject to the windfall elimination provision and those who do not have a non-covered pension and are not subject to the WEP. So I will cover this formula first without considering the windfall elimination provision and then I’ll show you the slight change in the formula that they make that adds in the penalty amount for that windfall elimination provision. So they take your average index monthly earnings and they start to run through this grid. For the first $896 of average indexed monthly earnings it’s applied to your full retirement age benefit at 90 percent. So in this case it would be. Eight hundred and six dollars and the remainder would be applied to your primary insurance amount at thirty to it now if you had a very high aim it would be applied at 15 percent at amounts beyond $5,300 and$40.

But in this case it did not exceed that fifty three hundred ninety nine dollars. And so it’s only into those first two bands and then you simply add up that last column that says PIA. And that gives you your full retirement age benefit. And in this case it would be $1,185. Now here’s where it gets different. If you have a pension from work where you did not pay Social Security tax and this is the only difference between the calculations instead of 90 percent in that first band it’s 40 percent. And so in this case it would reduce down the first amount from $806 down to $358. And instead of an $1,185 primary insurance amount that would be reduced down to $737.

Now those amounts and the bend points change every year so from that zero to eight hundred ninety six next year it will likely be from zero to $905-$910  or somewhere in that range. And all of the other points will change with that. So that’s the way the reduction works. And then once that penalty amount is applied with that lower been point it’s time then and only then to reduce or increase your benefit because of filing age. If you’re born between 1943 and 1954 your full retirement age benefit is 66 and every year thereafter it increases by two months all the way up until 1960 at which point it is set at 67. That could certainly change in the future. But right now that’s unknown.

So using the full retirement age amount of 66 years of age that is when you can get 100 percent of your pay. So that $737 if that was your benefit amount you would be able to get 100 percent of that. However if you filed early you would get less and you can see how it goes all the way back to age 62. You would only get 75 percent of that amount. However if you delayed and you waited all the way up until age 70 you would get a 132% of that amount. And though charts like these are fairly common where we express the increases or decreases on an annual basis they actually occur on a monthly basis. And here you can see that the 36 period prior to your full retirement age your benefit decreases by point .555% on a monthly basis and then anything beyond that it decreases by .417% and at your full retirement age and beyond it increases by .667% on a monthly basis.

So that’s it. That’s how you calculate your Social Security benefit if you have a pension from work or you did not pay Social Security tax.

Hope you’ve enjoyed this video. Check out my other videos on my YouTube channel. And also don’t forget to go to my Web site. Social security intelligence.com.

Thanks for watching!