Understand the factors that influence Social Security benefit amounts

Social Security was never intended to be the sole source of retirement income. Still, for most Americans, Social Security benefits will provide thousands — even hundreds of thousands — of dollars over the course of retirement. Despite its importance, people often plan for retirement without knowing what to expect from it. There are several factors that will impact the benefit amount your client can expect to receive. The exact amount will not be available until they actually file.

Earnings and the primary insurance amount (PIA)

An individual’s benefit amount is primarily determined by earnings. This may sound straightforward, but the Social Security Administration (SSA) considers the 35 highest-earning years, adjusts them for inflation, and applies a complex formula to arrive at the worker’s primary insurance amount. This is the benefit a person can plan to receive at full retirement age (FRA), which will fall between ages 66 and 67 depending on birth year. It cannot exceed the maximum amount (as adjusted annually for inflation).

However, even after claiming benefits, clients can boost their benefit amount by working when their current earnings are at least high enough to replace the lowest earnings number used in the PIA calculation.

Filing age

While earnings determine the PIA, this only represents the amount your client will receive if they claim benefits at their FRA. Claiming benefits early (as early as age 62) results in a decreased benefit amount. Delaying past FRA will increase the benefit by 8 percent per year up to age 70. The benefit amount is permanent, which makes choosing when to file one of the most important retirement decisions your clients will make.

The Social Security Administration designed the reduction for early filing to provide essentially the same total benefit as the retiree would have received filing at FRA, just in smaller amounts over more years. However, the longer your client lives, the greater the impact they will enjoy from increases they receive by waiting to file. The client’s health and life expectancy should therefore factor into filing decisions.

Inflation adjustments

The benefit amount, once claimed, is permanent — in most cases, there is nothing more your client can do to increase the benefit at that point, with a few exceptions. However, all benefits are indexed annually for inflation. In 2024, the increase was 3.2 percent.

Tax on benefits

56% of recipients pay income tax on benefits, according to SSA. Benefits become taxable based on other sources of income — wages, pension, withdrawals from retirement accounts and investment income (including tax-exempt interest on municipal bonds). To determine whether benefits are taxable, take the total income from the sources above and add half the benefit amount.

• If the total is greater than $32,000 (joint) or $25,000 (single), up to 50 percent of the benefit is taxable
• If the total is greater than $44,000 (joint) or $34,000 (single), up to 85 percent of the benefit is taxable

This applies to federal taxes. States may also tax Social Security benefits. Clients should consider the impact of taxation in decisions regarding continued employment.

Employment

If a client files early (before FRA) and continues to work, their benefit will be temporarily reduced based on earnings. However, once the worker reaches FRA, earnings of any amount will no longer reduce benefits. In fact, the SSA will recalculate the benefit amount, giving credit for any amounts previously reduced or withheld due to excess earnings.

An estimated benefit amount

Encourage clients to create a “my Social Security” account on the Social Security Administration website. They can verify their official earnings history and use the SSA calculator to get a rough estimate of their expected benefit at full retirement age.

You can add value by discussing the many factors that can impact this estimated amount and guiding clients through important decisions related to filing age and continued employment. The estimated benefit amount can also play an important role in a broader discussion about retirement income and how to address any anticipated gaps between income and expenses in retirement.

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