The Social Security retirement system pays monthly benefits to those who have paid into the system through mandatory payroll taxes. Once you reach age 62, you can begin collecting Social Security, although you won't receive a full benefit unless you wait until "full retirement age," which varies between 65 and 67, depending on the year you were born. The rules allow you to work while collecting Social Security, but the effect on your monthly benefit depends on your age.
Adjustments for Early Retirement
If you start Social Security before full retirement age, your monthly benefit will be reduced. At age 62, for example, you'll start receiving about 75 percent of the benefit you would be owed at full retirement age -- and the monthly payment stays the same, with inflation adjustments, for the rest of your life. If you work before reaching full retirement age, the agency will reduce your benefit $1 for every $2 in wages over a set limit ($15,720 in 2015). This adjustment also applies to spouse benefits, whether their own or a spousal benefit, and continues until the year you reach full retirement age.
Working Past Full Retirement Age
If you continue working in the year you reach full retirement age, your benefit falls by $1 for every $3 earned over a different limit ($41,880 in 2015). In the month you reach full retirement age, the reductions stop and your benefit amount remains the same no matter how much you earn. Social Security will recalculate the benefit amount based on your earnings record while leaving out any month in which your benefit was reduced.
Figuring the Benefit Amount
To figure the benefit amount, Social Security applies a complex mathematical formula using your record of annual earnings over a period of 30 years. In general, the more you've earned, the higher your Social Security check. The calculations don't stop once you start receiving benefits -- you still owe payroll taxes, and your earnings record continues to serve as a basis for your benefit amount.
If you earn more while drawing Social Security than you did while compiling your lifetime earnings record, the agency will recalculate your benefit. For example, if your lowest earnings year was at age 27, when you earned $8,000, and you then earn $20,000 in the year you reach 67, your benefit amount will rise in the year you turn 68. If the recalculation is done after the start of the year, the rise is made retroactive to January. Note that earnings means wages, and not income derived from investments or pensions.
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