I am a single person (never married) and will turn 70 at the end of October 2016 (29th) and have NOT started to receive SS benefits yet. The first payment will be scheduled for the beginning of November 2016.

Using the IRS on-line calculator and entering the exact amounts from the SS statement received in the mail the following was shown: for the year 2016 earnings of zero (worse case since I am self-employed) was put into their calculator and the benefit amount came out to $3240 per month.

Then the exercise was done again, and the maximum amount of $118,500 earnings was entered for 2016 (that SS tax is paid on) and the answer came out the same, $3240. The actual earnings will in the $50,000 to $90,000 range.

It is my understanding that SS benefits are paid on the 35 HIGHEST EARNING YEARS and that a year of higher earnings at the end of a person's career replaces a lower earning year earlier in their career.

This being the case Mr. Kotlikoff, why does the SS calculator show the $3240 monthly benefit amount if the final year of employment show zero earnings as well as the maximum taxable earnings of $118,500? Logically speaking, this does not make sense.

Lee,
Your benefits are determined by the 35 highest INDEXED yearly earnings, not the highest nominal yearly earnings. Indexing by the National Average Index expresses your past nominal earnings in terms of current dollars when calculating your benefit. So, even if your 2016 earnings were larger than some of your past nominal earnings, they may not be larger than your past indexed earnings. If so, your benefit wouldn't be increased.
Best,
Mike