SLEDGE: Does time contribution determine the benefit?

Q: Ned, I’ve heard that one person could pay into Social Security for 40 years or more and yet someone else who works at the same salary for the minimum number of quarters will draw the same benefit. Is this correct? It hardly seems fair. Greg

A: This is definitely not correct, Greg. What’s going on here is a confusion between the way we determine eligibility for retirement benefits — what we call “insured status” — and the way we calculate the benefit the insured worker will receive.

To be eligible for retirement benefits, everyone today must have a minimum of 40 work credits. We call these credits “quarters of coverage.” As the term “quarter” implies, you can earn up to four a year. In 2009, you get one quarter of coverage for every $1,090 earned. To get all four quarters, then, you’d have to earn at least $4,360. And since it takes 40 quarters to be insured for benefits, you’d have to work for at least ten years earning four quarters a year to reach a total of 40. Now insured status for Social Security is like the pass-fail system in school. All you have to do is cross the threshold. If you have 40 quarters, you’re eligible for a benefit. If you have 140 quarters, you have 100 more than you needed. You’re not “more” insured than you would have been if you’d had just 40. So the worker in your example who worked for 40 or more years, and the one who worked for the minimal ten years, are equally insured.
But will they get the same benefit? Hardly. Let’s talk now about the way we figure the benefit amount. And here the key thing to understand is that retirement benefits are based on an average of your highest 35 years of earnings, after adjusting for inflation to elevate past earnings to near-current dollar values. After making this adjustment, the system selects your 35 highest years, adds them up, and divides this total by 420 — the number of months in 35 years. The result is what we call the Average Indexed Monthly Earnings, or AIME. A formula is then applied to the AIME that produces the benefit amount payable at your full retirement age. For most of us, this benefit, which we call the Primary Insurance Amount, comes to around 41 percent of the average indexed amount for those 35 best years.

So your two workers each had at least 40 quarters of coverage, giving them both insured status for retirement benefits. But the first had more than 40 years of work, allowing us to throw out the lowest years and use his highest 35. The second, however, had only the minimum ten years needed to be insured — so in figuring an average for his 35 best years, we had in effect to add in 25 zero-dollar years. As you can well imagine, this is going to significantly pull down the average! The result is that, while they’re equally insured, they’ll hardly receive equal benefit amounts.
To get an estimate of your own benefit, go to http://www.socialsecurity.gov/estimator.