SLEDGE: Why does my neighbor receive more benefits than I get?

Ned Sledge is a Social Security Public Affairs Specialist in Richmond. Questions about Social Security issues may be directed to him by e-mailing .
Published: November 12, 2008

Q: “My neighbor and I earned about the same in our lifetimes. So why does he get more in retirement benefits than I do?
A: In the many years I was an SSA claims representative, I heard stories like this time and time again – stories where folks had been instructed about Social Security by friends, family, neighbors, and so on. Sometimes the information they’d heard was flat wrong. Sometimes it was actually right, or mostly right – but only for the one who’d said it, not for the one who’d been told. And there’s always that troublesome word, “about” – as in your statement that you and your neighbor earned “about the same.”
Social Security benefit computations are complex operations, and include many years of earnings. Unlike other pension programs – the kind that have become ever rarer in an age of 401(k)s – Social Security retirement benefits are based on earnings that are averaged over most of a worker’s lifetime. If you were born after 1929, your benefit is going to be derived from the average of your 35 best years of work. With that many years being used, even minor variations in earnings over the years from one person to another can result in a significantly different end result. What’s more, before the benefit is figured, your past earnings are increased – “indexed,” we say – to neutralize the effects of inflation by making those past earnings resemble today’s dollar value. Now one effect of indexing can be to magnify differences in your and your neighbor’s past earnings. Let’s say, for example, that in 1968 (when wages were so much less than today, of course), you earned $5500 and your neighbor earned $6000. That’s just a $500 difference. But when those two figures are indexed, your $5500 becomes about $38,150, while his $6000 becomes about $41,600 – and now the gap between his earnings and yours has widened to over $3400 for that one year alone.
You see how “about the same” can soon stop seeming so similar after all? And there are many other factors – “variables,” the mathematicians call them – in the computation that over a lifetime of earnings can stretch out what seemed to be minor differences at the time. The pattern of work can be important, for instance: if your neighbor had consistently made a little more each year, whereas you had some years in which your earnings dropped below what they’d been before, that can have a surprisingly significant effect when the computation is performed – especially when you remember how indexing can affect those earnings. And if you’d had some years without work, let’s say, or were self-employed and had some years when you’d had no taxable earnings, then your total number of years with positive earnings could possibly be less than 35. In that case, the computer will add in zero dollar years. For example, if you had only 32 years of earnings, the system would add in three years of zero earnings. But when you look back over your working career, the years in which you did have earnings may have more or less resembled what your neighbor made – “about the same,” in other words, although not really when examined in detail.
Finally, how close are you and your neighbor in age? This can affect the “indexing factors,” which are the amounts by which each past year’s earnings are increased to make them resemble near-current dollar values. The older you are and the farther back in time your work was done, the more your past earnings have to be increased to create current equivalencies. And – this really is the last one I’ll mention – how old were you and your neighbor when you had your Social Security benefits begin? The younger you were at the time of your entitlement, the larger the reduction in your benefit, so that even if you and he had exactly the same unreduced benefit – the amount payable at your full retirement age – he’d be getting 100 percent if he had it begin at his full retirement age, whereas if you began your entitlement at 62, you could be getting as little as 75 percent. Pretty big difference in benefits for two people who had “earned about the same.”
So beware of that little word “about”; remember that differing circumstances can lead to very different results; and visit http://www.socialsecurity.gov for reliable guidance when you have questions about Social Security.