Social Security question: Is this true?

Gary is almost correct - the IRS doesn't calculate your Social Security - Social Security does. And the amount you get is calculated from taking your best thirty-five years of earnings. Not the last thirty-five years but the thirty five years with the highest earnings. If you have less than 35 years - then the remaining years are recorded as zero income. If you have more than 35 years, then Social Security ignores the years where you earned the least. Each years income is adjusted for inflation - so if you earned $2,000 twenty five years ago and prices are five times higher now - then your income for that year becomes $2000 x 5 = $10,000.

Each year has a different multiplier. There's a calculator at social security that does the calculation for you.

It is a good idea to check the income reported to Social Security for each year - my wife found about $20,000 income from twenty years back missing - and had it corrected.

False...your Social Security benefits are calculated based upon your high 35 years of earnings. If you do not have 35 years of earnings, you substitute $0 for each year you had no earnings. Depending upon how many years you worked at the assumed $50,000, the last two years at $25,000 would have lowered the average just a bit.

For example, if you worked 38 years at $50,000 for 36 years and $25,000 for two years, your high 35 average would be $35,000. If you worked 33 years at $50,000 and 2 years at $25,000, your average would be (33 x $50,000) + (2 x $25,000) / 35 = 1,650,000 + $50,000/ 35 = 1,700,000/35 = $48,571.

Your average monthly earnings (which is how you benefit will be calculated) in the first example, is $4,166 without any inflation adjustments, etc., you benefit is 90% of the first $816 ($714), and 32% of the rest (the next cutoff is $4,917, which you would be under) of $3,360 or $1,075 which totals $1,786.

In example, two, your average monthly earnings are $48,571/12 = $4047. You would still get the $714 and then 32% of $3,231 = $1,033 - add in the 714 and you would have a benefit of $1,747 - about $40 less.

Note that this is just based upon a flat earnings - there are other adjustments (for inflation) that are made. You can get your estimated benefit directly from the Social Security Administration (they mail it annually or you can set up an account on their web site to get it electronically).

No. The IRS has, SURPRISE!, a complicated formula for figuring your "average" annual income which covers the last 30 years of tax returns. The formula is complicated because it factors for inflation and other things. I think Congress "screws around" with the exact formula because the IRS website says you should contact the IRS before you retire to let them calculate it.

And... there may be errors in your IRS file going back 30 years so you should DEFINITELY find out what numbers the IRS is using (which you can find out today by creating a username and password with IRS.gov). If you find errors, it may be worthwhile to get IRS to fix them.

Even if there are no errors... Certainly if the 30 years includes years where you were in school and, maybe, only working part time or not at all, this will have a proportionally larger effect on this calculation (and you may decide to continue working your current full time job another year to bump up this average).

Steve D gave you the right answer. Gary H. is wrong it is not the IRS that does the calculation.