Does Working More Mean More Money from Social Security?

Last Updated Mar 17, 2011 4:05 PM EDT

When investors ask me about Social Security, they often ask if working longer will provide a boost to their Social Security benefits. I asked Tiya Lim, my co-author on The Only Guide You'll Ever Need for the Right Financial Plan, to provide some input.

Investors approaching retirement often ask whether they should work a few more years to boost their Social Security benefits. While it really depends on the individual and his or her work history, the answer is generally, "No."

A paper published by the Social Security Administration calculated the marginal returns on Social Security taxes for workers nearing retirement. Basically, the study researched how much more in benefits a worker would receive for each additional dollar of Social Security taxes paid. The study found that on average, the marginal returns workers received are low. In particular, the study found that different subgroups of workers received varying degrees of benefits.

First, it's important to understand how Social Security benefits are calculated in order to understand how a few more years of work can affect benefits. You need at least 10 years of work history to qualify for benefits, which are then based on your highest 35 years of earnings. For those with more than 35 years of work history, only the top 35 years are considered. For those with less, zeroes are averaged in to the formula.

The subgroup of workers that benefited the least from additional work years included:
  • Workers with 35 years or more of work history
  • Workers who wouldn't have 10 years of work history to qualify for benefits
  • Workers who rely primarily on dependent benefits (spousal, survivor)
The subgroups that benefited the most were:
  • Workers with fewer than 35 years of earnings
  • Workers with low lifetime earnings
  • Workers with almost 10 years of work history
The study found that, on average, the workers in the study would receive 24.9 cents of additional benefits for each additional dollar of taxes paid. Although the marginal benefits for each additional year of work may be small, it's important to note that working a few more years can still benefit you by continuing to allow your portfolio to grow and allowing you to delay filing for Social Security, which will result in a higher monthly benefit.

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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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