NCPA - National Center for Policy Analysis

The Incentive to Work Past the Full Retirement Age

February 15, 2013

For many workers, a retirement at 65 years old or 67 years old comes far too early. Indeed, working past the full retirement age is a smart move despite the obscure logic that justifies it, says National Center for Policy Analysis Senior Fellow Laurence Kotlikoff.

  • Social Security averages your highest 35 years of earning to figure your Average Indexed Monthly Earnings (AIME) which is then plugged into a formula that figures out your full retirement benefit, called your Primary Insurance Amount (PIA).
  • The PIA determines what benefits you and your family will receive after retirement.
  • If someone works from age 16 to age 65, Social Security will take the highest 35 years of that 49 year period to calculate your AIME.
  • This means that if your current income is larger than the smallest of that set of 35 earning years, you will raise your PIA and benefits.

Kotlikoff uses his personal finances to illustrate why working longer and delaying retirement is a wise choice. If Kotlikoff, who started paying significant amounts into Social Security at age 29, were to stop working today and wait until age 70 to collect benefits -- when they would start at their highest value -- his lifetime benefits would be $774,210. If he works until the age of 70, his lifetime benefits would rise by $80,312 to $854,522. If he works until the age of 80, his lifetime benefits would rise another $88,154 to $942,676.

  • In the above scenario, each figure already includes the Delayed Retirement Credit, which increases your benefits if you start them after full retirement up to the age of 70.
  • Regardless of whether a spouse works or not, Kotlikoff also figures that spousal benefits will rise when an individual continues to work past the full retirement age.
  • In his example, Kotlikoff drops a lower year counted toward his AIME because his current yearly income is above Social Security's covered earnings ceiling.

Working later in life, assuming a higher yearly income than in younger years, will allow individuals to raise their Primary Insurance Amount and receive larger Social Security checks. Kotlikoff suggests that working past the full retirement age makes sense for anyone whose current income in higher than the lowest earning year of the 35 years that are counted toward AIME.

Source: Laurence Kotlikoff, "Social Security's Huge Obscure Incentive to Keep Working," Forbes, February 12, 2013.


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