Every month, the Social Security Administration keeps millions of dollars’ worth of benefit payments that have been rightfully earned by individuals with work histories that should entitle them to receive that money.
For most of us, taking anything that doesn’t belong to you is considered theft. Theft is a crime, and there are a lot of people who are paying the price for committing such a crime right now.
Maybe their crime was egregious as armed robbery. Perhaps they engaged in some less-physically violent form of theft, like embezzlement or even tax evasion (which is pretty ironic considering what I’m about to tell you).
Either way, it’s all considered a crime of theft and such actions land normal folks like you and me in prison.
But the Social Security Administration? It sure does seem as if they don’t follow the same rules that we do.
In fact, they engage in theft on a daily basis! Social Security steals so much that when you add it all up, they steal more than $378 million dollars every year.
And if you receive Social Security benefits, or will in the future, this impacts you.
How the Social Security Administration Gets Away with Stealing Hundreds of Millions
Now, I know you’re probably thinking:
If the Social Security Administration was really stealing money from hardworking people like you and me who dutifully pay our taxes and contribute to the system so that we can also get a benefit some day, you would have heard about it before now.
Maybe… obviously, Social Security isn’t going to openly admit to this theft. Instead, they do this under the guise of simplifying the benefit’s calculation process.
They obscure what’s really going on by using an old classic bureaucratic move of taking something untasteful and just calling it something else.
The word they use for it in this case?
The Law of Large Numbers Makes Simple Rounding into Downright Theft
“Rounding” is a fairly harmless word by itself. But when you consider the law of large numbers, it morphs into a massive transference of your tax dollars into someone else’s pocket.
Most of this rounding came out of the Omnibus Reconciliation Act of 1981, and it was allowed as just a pure cost savings measure. I’m going to show you just how much these cost savings are in just a moment, but for each individual, it doesn’t impact you very much.
That’s probably why we just don’t hear any outcry about how the Social Security Administration uses rounding in its benefits calculations — but the collective amount of savings really, really adds up.
There are several places within the convoluted Social Security system where this rounding occurs, so let’s start at the beginning of the journey to see where this rounding occurs.
Where Rounding Occurs (and Takes Away Your Benefits) in Social Security Calculations
First stop: your actual earnings.
The Social Security Administration uses your historical earnings as the beginning point to calculate your monthly benefit. Your reported earnings are recorded to your earnings record on an annual basis. You can view your record at your mySSA account.
Before Social Security records these earnings, they drop everything after the decimal. If your earnings were $50,931.84, they record this as $50,931.00.
The second stop in your benefit’s rounding is in the calculation of your average indexed monthly earnings (AIME).
The AIME is simply the highest 35 years of earnings from your earnings record after being indexed for inflation. All 35 years are summed up and then divided by the number of months in 35 years to establish the monthly average.
But before putting your AIME amount through the benefits formula, the folks at the Social Security Administration round it down to the whole dollar (just as they did with the earnings recorded each year).
The third stop in the rounding journey is applying your rounded AIME to the bend point formula. The result of this calculation is your primary insurance amount (PIA) and is rounded down to the next lower multiple of $.10.
The fourth stop is the big one, the one that really adds up. This is the rounding of your final monthly benefit.
Before your rounded PIA becomes your actual benefit amount, it is reduced or increased depending on whether or not you file for benefits before full retirement age or after. Then the result is rounded down to the whole dollar.
Interestingly, they do this after deductions for Medicare Part B premiums if you pay those… and on that note, guess what doesn’t get rounded down?
You guessed it: Medicare premiums. They’re deducted in the exact dollar amount that’s announced from the Centers for Medicare and Medicaid Services.
How Rounding Off a Few Cents Here and There Really Adds Up
It’s very difficult to go through all the steps and quantify the impact of the rounding from step one all the way through, but we can measure the “cost savings” from just the final steps. And it’s measured in the millions of dollars.
So let’s look at an example of rounding in action.
Let’s assume that your calculation produces a primary insurance amount of $1,679.38. This is the part that would be rounded down to the next dime, so it would become $1,679.30.
Then the Part B premium would be deducted ($144.60 in 2020), meaning you’d have a monthly benefit of $1,534.70 at this point. But then this would be rounded down to $1,543.
Your benefit would be 70 cents lower due to this rounding. Big deal, right? That comes out to $8.40 per year.
You can’t hardly eat at Chick-fil-A for that. But that’s not the point. The point is this is your money. But when this law was passed, the politicians used the same playbook that they use now. And that’s if you take just a little from a whole lot, it adds up to big dollars.
So just how much do they keep from this rounding?
The Total Impact of Rounding Down Benefit Amounts
I think it’s safe to assume that the average Social Security benefit is rounded down by 50 cents. That’s the midpoint of the dollar. Some benefits are higher than that to the right of the decimal and some are lower, but we’ll use that as the average midpoint.
And considering that there are nearly 63 million individuals who are on Social Security benefits, what if each benefit was rounded down by 50 cents? Well, that would come out to more than $31 million per month.
And when you take that out over the 12 months, that comes up to more than $378 million.
Again, that’s only considering the impact of the lower dollar rounding to the final monthly benefit; it does not account for the rounding that happens before this calculation nor does it consider the other rules about rounding that probably drive this number considerably higher.
For example, if someone is dually entitled, like a spouse, getting their benefit from their own work and part of it from a spousal benefit, both of those benefits are rounded down. There are nearly 7 million women alone who fall into that category. So this is probably much bigger than $378 million per year.
I don’t spend too much time thrashing the Social Security Administration. For such an enormous government agency, they do a decent job. The reason I bring this out though, is to remind you, don’t put too much faith and trust in any government agency, especially one that controls such a valuable piece of your retirement income.
Get informed about your benefit options and make sure you understand how the rules affect you. And don’t just take their word for it, whatever you do.
If something doesn’t sound right, talk to another technician at your local office. If it still doesn’t sound right, go to another office; there’s nothing that says you have to use any specific location for help.
You can travel the nation and see all of them. There are some really smart people who work for the Social Security Administration and sooner or later you’ll find them. But you’ll also find some folks who really don’t give a flip about you or whether you’re getting the right benefit amount. And you’re still reading this article. So that tells me that you care enough to invest the time to learn.
Before you leave… be sure to join my FREE Facebook members group. It’s currently at 8,000 members and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. You should also consider join the 260,000+ subscribers on my YouTube channel! And you may also want to check out the resources below with links to the Social Security Administration’s website that goes over this topic of rounding if you want to dig in a little bit further.
One last thing, be sure to get your FREE copy of my Social Security Cheat Sheet. This is where I took the most important rules and things to know from the 100,000 page Social Security website and condensed it down to just ONE PAGE! Get your FREE copy here.
Rounding Along the Benefit’s Calculation Trail
- Actual Earnings – Truncated(dropping everything after decimal) before adding to SS earnings record https://secure.ssa.gov/poms.nsf/lnx/0300601020#C
- AIME – 35 indexed years / 420. (The result is rounded down to the next lower dollar amount) see B(e) at https://secure.ssa.gov/poms.nsf/lnx/0300605021
- PIA – to the next lower multiple of $.10 https://secure.ssa.gov/poms.nsf/lnx/0300605021#2
- Final MBA – lowered to next lowest dollar AFTER deduction for Medicare Part B. https://www.ssa.gov/OP_Home/handbook/handbook.07/handbook-0738.html#:~:text=The%20monthly%20amount%20payable%20is,the%20lower%20multiple%20of%20%241. AND https://www.ssa.gov/oact/cola/colaapplic.html AND https://www.ssa.gov/OP_Home/handbook/handbook.07/handbook-0738.html
- COLA is rounded down to one decimal (and then the PIA is again truncated) https://www.ssa.gov/oact/cola/colaapplic.html
SS Handbook Section on Rounding
POMS Section on Rounding