The recalculation of Social Security benefits is not unusual. There are a variety of circumstances which can trigger a recalculation so it’s important to know when and how your benefit can change if this happens to you.
Recalculation vs. Recomputation
Before we get too far, let’s clear up some of the terminology. There are actually two terms that sound a lot alike, but they have different meanings. After all, we are dealing with Social Security rules here and terms that we use synonymously in everyday language don’t always have the same meaning with the SSA.
These two terms are recalculation and recomputation.
- Recalculation: A recalculation is where your benefit can be increased or decreased if they find clerical or mathematical errors or earnings that were incorrectly included in the first computation. A recalculation is NOT all that common.
- Recomputation: Changes your benefit based on earnings that were not included previously. In most cases, it increases your benefit amount.
To illustrate the differences between these two terms, let’s cover the first two steps in a benefit calculation.
How Social Security benefits are calculated
The Social Security Administration (SSA) determines your initial benefit amount by applying your historical earnings to the formula in place for the calendar year you turn 62.
Your historical earnings aren’t simply used at face value. Instead, your earnings prior to age 60 are indexed for inflation to bring them up to current-day wage levels. To do this, the SSA uses the average wage index as its guide and inflates the prior earnings. Earnings at 60 and beyond are used at face value. Once they have all of your indexed earnings information, they take the highest 35 years and divide by 420 (the number of months in 35 years) to obtain the average on a monthly basis.
Suppose you only worked 25 years? In that case, they would use 10 years of zero earnings for the years you did not earn, lowering your average. On the other hand, if you had 45 years of earnings, Social Security would still only use your highest 35 inflation adjusted years to determine your benefit.
Although this is calculated at 62, there are situations where your benefit can change after the initial calculation. This can be due to additional earnings, corrections to your earnings record, or the discovery of a clerical error.
So one of the first steps to understanding how a recalculation or recomputation may impact you is to understand your personal historical earnings after those earnings have been indexed for inflation. That way, it’ll be very clear to you which of your earnings years should and should not be included in the final calculation.
How these earnings are indexed can seem a bit mysterious at first, but it’s not all that difficult. To do this, you need to complete two simple steps:
- Get a copy of your personal earnings record. To do this, you need to visit your mySSA account. In the past we would just say get a recent copy of your Social Security statement but now the SSA is not showing a complete history of your earnings on the new version of the statement. Instead, you’ll need to navigate down to the link that says, “review your full earnings record.”
- Get your indexing factors. Once you have your earnings history, you want to go over to the SSA webpage and get the indexing factors that are specific to the year you turn 62. Once you put in the calendar year you turned 62, and it’s going to fill in all the indexing factors for you. Then all you have to do is take your real earnings from your earnings history and multiply by the factors shown. And this gives you your indexed earnings. From this list of earnings, only the highest 35 years are used in your initial benefit calculator.
Now that you know it’s your highest 35 years of earnings that are used, and how to determine which of your historical earnings are used in the list of high 35, it’s a little easier to understand when a recalculation or recomputation will be used and how it will impact you.
The Recalculation of Social Security Benefits
Since a recalculation of benefits is the least common method the SSA will use, let’s quickly cover that. Then we’ll move on to the much more common recomputation of benefits.
A recalculation is only performed to correct a benefit that was calculated with incorrect or missing earnings (usually from a mistake). For example, if there were earnings included in your initial benefits computation that was found to be incorrect, your benefit would be recalculated. And again, remember that a recalculation can increase OR decrease your benefit.
The Recomputation of Social Security Benefits
A recomputation is very different and much more common so the easiest way to make sure we cover this is to simply answer the most common questions I get on the recomputation of benefits.
How common is a recomputation of benefits?
Very common! In fact, nearly everyone has at least one benefit recomputation.
This is because of how your earnings are reported to the Social Security Administration. In most cases your benefit calculation, which is performed in the year you turn 62, does not include the earnings from that year. That’s because these earnings aren’t reported to the Administration until the fall of the following year. For example, earnings for 2021, won’t be reported until around September 2022. They refer to these as “lag years”. So if you stop working at the end of 2021, your benefit payment won’t be calculated with the earnings for 2021. Once those earnings are reported, the benefit will be recomputed to reflect those earnings.
What about earnings AFTER you file for benefits?
If you file for benefits, and then either keep working or return to work, those earnings will result in a recomputation as long as they replace one of the earnings years in the high 35 calculation. This is why I believe it is so important to clearly understand the basics of your benefit calculation that we discussed earlier.
Is a recomputation automatic or should I do something?
Well, this process is supposed to be automatic. According to the rules, they say, when a recomputation is called for, we perform it automatically. But as you may have guessed, there are sometimes a few hiccups in the system. So you don’t have to wait on them to initiate their automatic process. You can request an immediate recomputation if you have some evidence that you have earnings in addition to what they used when they calculated your primary benefit amount. Just know that requesting this recomputation will not result in having your benefit increased any faster than it would under the automated process.
When will a recomputation become effective?
In most cases, benefit recomputations are effective January of the year following the year the earnings were earned. For example, earnings for 2021 will be included in a recomputation effective January 2022. Because of the lag time this can lead to retroactive payments, and I’ll address that next but first lets cover the two exceptions to how a recomputation becomes effective.
The first exception is if you die. In that case, the survivors benefit paid to your beneficiaries will be effective in the month of death. For example, if you are still working and you die in June, your survivors won’t have to wait until the following January for the earnings to increase the benefit. That benefit increase will become effective in the month you die.
Another exception is if you become entitled to a pension from a job where you did not pay Social Security taxes. In that case your benefit would be recomputed effective with the month you became entitled to that pension.
Can a recomputation decrease your benefit?
The short answer is No. A recomputation will only be applied if your primary insurance amount can be increased by at least $1. There is one exception to this and that is if you become entitled to a pension from a job where you did not pay social security taxes. For example, if you start receiving social security benefits at 62, and then your non-covered pension starts at 65, your benefit will be recomputed with an alternate formula and this WILL result in a decrease in benefits. But that’s only an issue for those who have work where they did not pay social security taxes.
So unless you are dealing with survivors benefits or becoming entitled to a pension from work where you did not pay Social Security, a recomputation always becomes effective in January of the year after the earnings increase your highest 35 years of earnings.
And because these earnings aren’t usually added until several months after January, this leads to the obvious question of…
Can a recomputation pay you retroactively?
The Social Security administration will typically receive your earnings for the prior year by the fall of the following year. For example, your earnings for 2021 will become available for a recomputation around September 2022 at the latest. If they perform a recomputation and see that your benefits should increase, that increase will be paid retroactively to January 2022.
Get help with Social Security
If you are planning to file for Social Security, and want to make sure you get all the benefits you deserve, you need to realize this is not a DIY project. There are thousands of possible filling combinations and nuanced rules that make each situation different and in most cases, you only get one chance to make a good decision.
There’s no way around it…you need to get professional help before you file. You can get started with a free 15-minute consultation from my team of Registered Social Security Analysts. They’ll listen to your unique situation and let you know how a strategic plan can cut through all the complexity and give you clear direction on your filing strategy. Schedule your call today!