Is this fair? Well, consider that your benefit rate is based on your highest 35 years of earnings under Social Security. The higher your earnings average or AIME is, the higher your benefit will be when you retire. If you continue working after you start your benefits, Social Security will automatically review your record each year to see if prior year earnings would increase your benefit. If these earnings increase your 35 year average, your benefit rate will be increased effective with January of the next year. You still pay the tax but you also get the benefit of those extra earnings if they will increase your benefit rate.
How it works. Let's look at an example.
Ann applies for Social Security at age 66 (her full retirement age or FRA) with 30 years of earnings. Her benefit rate is based on the sum of her 30 years of earnings divided by 35. This means that her 35 year average includes 5 years of zero earnings. Since she waited until her FRA to apply for benefits, she can continue working and still receive her full Social Security retirement benefits. Her employer will withhold the usual 6.2% Social Security and 1.45% Medicare tax from her paychecks and report her earnings on her W-2 Form. These additional earnings will then be used to replace a zero earnings year and increase her benefit rate. Ann will receive a rate increase each year as long as she works and her yearly earnings are high enough to replace a lower year in her 35 year average.
Many women receive a lower monthly benefit because they dropped out of the workforce for a time to care for children or other family members. For these women even working part-time after "retirement" can help them make up for these lost years of earnings and therefore increase their lifetme Social Security benefits.
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