Why Did Maximum Benefits Go Down?

Sep 9 2016 - 11:45am

I plan to retire @ 70 next year (2017) and have found that my maximum monthly benefit has been decreased in 2016 (Newsmax or BBC article following) Will there also be a decrease in 2017? I am struggling to wait the 4 extra years only to see my maximum benefit decreasing. Do you know about this change?

Maximum possible benefit declines. The maximum possible Social Security payment for a 66-year-old worker who signs up for Social Security in 2016 will be $2,639 per month, down $24 from $2,663 in 2015. "A decrease in full maximum benefits occurs when there is no cost-of-living adjustment, but there is an increase in the national average wage index," according to a statement from the Social Security Administration.

Best Regards,
Bob

Hi Bob,

I hate to bore you with a detailed explanation, but if you want one, you can start by reading this: https://www.ssa.gov/pubs/EN-05-10070.pdf.

Suffice to say that the change you refer to does not have any affect on your benefit amount. Social Security retirement benefits are based on a person's best 35 years of inflation adjusted earnings. They use the average annual wages in the year a person reaches age 60 as the indexing year, and adjust all of that person's previous years of earnings to reflect what they would have earned in the newer dollars. For example, say a person turns 60 in 2016, and the average annual wages in 2016 are $50,000. If the average annual wages in 1996 were $25,000, the indexing factor for 1996 would be 2.0 in this example. So, if that person earned $30,000 in 1996, they would be credited with $60,000 of inflation adjusted earnings for that year when their Social Security benefit is calculated.

Thus, each year of birth has it's own independently calculated maximum possible Social Security benefit. That 'maximum' benefit is calculated based on what the person would get if they had earnings at or above the maximum amount subject to Social Security taxes in the previous 35 years. Even then, if that person continues to working, they can continue to increase their benefit above this original 'maximum' by replacing lower years of past earnings with their higher continuing earnings.

To adjust for inflation, Social Security uses average annual wages throughout the economy. The averages usually increase from one year to the next, but occasionally they decline during recessions and depressions. When this occurs, the inflation adjustment decreases marginally, resulting in lower average earnings being credited in the benefit calculation. Without an offsetting cost of living adjustment, the maximum possible benefit goes down somewhat.

The reason this doesn't affect you is because you are now age 69. Your past earnings were adjusted based on average annual wages in the year 2007, so any subsequent decreases in average annual wages had no affect on your benefit amount.

Best, Jerry

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