A complex formula determines how your Social Security benefits are calculated. The following factors go into the formula:
- How long you work
- How much you make each year
- At what age you begin taking your benefits
Take a look at how these factors affect the benefits you will receive and how the Social Security Administration calculates its figures.
- Your Social Security benefit is decided based on your lifetime earnings and the age you retire and begin taking payments.
- Your lifetime earnings are converted to a monthly average based on the 35 years in which you earned the most, adjusted for inflation.
- Those earnings are converted to a monthly insurance payment based on your full retirement age.
- Your monthly payment will decrease or increase if you retire earlier or later than your full retirement age (up to age 70).
How Is Social Security Calculated?
There is a three-step process used to calculate the amount of Social Security benefits you will receive.
Step 1: Use your earnings history to calculate your Average Indexed Monthly Earnings (AIME).
Step 2: Use your AIME to calculate your Primary Insurance Amount (PIA).
Step 3: Use your PIA and adjust it for the age you will begin benefits.
You can use a copy of your Social Security statement that provides your earnings history to plug your own numbers into the formulas below.
Step 1: Calculate Your Monthly Earnings
Your Social Security benefit calculation starts by looking at how long you worked and how much you made each year. This earnings history is used to calculate your AIME. Here's how to find it.
List Each Year's Earnings
In the table below, example earnings for a hypothetical worker born in 1953 are shown in Column C. Only earnings below a specified annual limit are included. This annual limit of included wages is called the Contribution and Benefit Base and is shown as Max Earnings in Column H in the table.
Adjust for Inflation
Social Security uses a process called wage indexing to determine how to adjust your earnings history for inflation. Each year, Social Security publishes the national average wages for the year. You can see this published list on the National Average Wage Index page.
Your wages are indexed to the average wages for the year you turn 60. For each year, you take the average wages of your indexing year (which is the year you turn 60) divided by average wages for the year you are indexing, and multiply your included earnings by this number.
- In the table below, see actual wages of $21,000 for 1984 in Column C.
- In column D are the average wages according to the National Wage Index.
- Take $44,888.16, which is the average earnings for the year this person turned 60 (2013), divided by $16,135 to get the Index Factor you see in Column E.
- Multiply 1984's earnings by this index factor to get $58,423, which you see in Column F.
Because of how the wage indexing formula works, if you are not yet 62, your calculation to determine how much Social Security you will get is only an estimate. Until you know the average wages for the year you turn 60, there is no way to do an exact calculation. However, you could attribute an assumed inflation rate to average wages to estimate the average wages going forward and use those to create an estimate.
Average the Highest 35 Years
The Social Security benefits calculation uses your highest 35 years of earnings to calculate your average monthly earnings. If you do not have 35 years of earnings, a zero will be used in the calculation, which will lower the average. In the table below, the highest 35 years are listed in Column G.
Total the highest 35 years of indexed earnings and divide this total by 420, which is the number of months in a 35-year work history, to find the Average Indexed Monthly Earnings.
For our example worker, who was born in 1953 and turned 60 in 2013, the highest 35 years of wages total $1,919,040. Divide by 420 to get an AIME of $4,569.
|How to Calculate Your AIME for Social Security Benefits|
|Year||Age||Actual Wages||Average Wages||Index Factor||Indexed Wages After Cap||Highest 35 Years||Max Earnings|
|undefined||undefined||From Social Security statement||From S.S.A. website||Age 60 Avg. Wage / Actual Year's Avg. Wage||Multiply Year's Actual Wages by Year's Index Factor||Take 35 highest Indexed Wages. Enter 0 for missing years||From S.S.A. Website|
Step 2: Calculate Your Primary Insurance Amount (PIA)
Once you have calculated your Average Indexed Monthly Earnings (AIME), you'll plug that number into a formula to determine your Primary Insurance Amount, or PIA. This formula is based on something called "bend points."
Social Security Bend Points
The Social Security benefits formula is designed to replace a higher proportion of income for low-income earners than for high-income earners. To do this, the formula has what are called “bend points." These bend points are adjusted for inflation each year.
Bend points from the year you turn 62 are used to calculate your Social Security Retirement Benefits. The example in the table below uses 2020 bend points. It works like this:
- You take 90% of the first $906 of AIME.
- You take 32% of the next $5,785 of AIME.
- You take 15% of any amount over that $5,785.
- You total those three numbers.
The result is your Primary Insurance Amount, or PIA, the amount you will receive if you begin benefits at your Full Retirement Age (FRA).
Your PIA is rounded to the next lowest dime, and your benefit amount is rounded to the next lowest dollar.
Technically, your PIA is calculated, rounded to the next lowest dime, then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Then any increase or decrease based on age is applied. That number is then rounded down to the next lowest dollar.
You can see current and historical bend points and the current year's bend points on the Bend Formula Bend Points page of the Social Security website.
If you are not yet 62, your benefit calculation is only an approximation, as you do not yet know what the final bend point amounts for the year you turn 62 will be. You can use an estimated inflation rate to approximate future year's bend points to develop a pretty accurate approximation.
In the example in the table below, you can see how the AIME calculated in the previous step was plugged into the bend point formula to calculate the PIA.
|Using AIME to Calculate Primary Insurance Amount (PIA)|
|Example using AIME of $4,569 / month||Taxable Wage Amount||Multiplier||Solved|
|Bend 1 (up to $826)||826||.90||743.40|
|Bend 2 ($4,569 - $826)||3,743||.32||1,197.76|
|PIA After Rounding (down to nearest dime and dollar)||$1,941|
|Benefit at Full Retirement Age (FRA)||$1,941|
Can Your PIA Change After You Reach Age 62?
There are two things that affect your PIA after you reach age 62:
- Higher earnings: Earnings in years between age 62 and 70 that are higher than one of the 35 highest earnings years previously used in the formula will change your AIME which is used in the PIA formula.
- Inflation: Your PIA will be adjusted by the same Cost of Living Adjustments applied to people who are already receiving Social Security benefits. You can see historical Cost of Living Adjustment Rates on the Social Security website.
You may get the wrong answer when they running your own calculations on when to begin Social Security if you simply take the numbers off your statement and do not properly apply inflation adjustments.
Step 3: Adjust Your PIA for the Age You Will Begin Benefits
The final amount of Social Security Retirement benefit that you receive is based on the age that you begin benefits.
The earliest you can begin retirement benefits is age 62 (age 60 if you are eligible for a widow or widower's benefit on a deceased spouse's or ex-spouse's record). You get more by waiting until a later age—as late as age 70—to begin benefits.
Of course, another complex formula is used to determine how much more you will receive if you wait.
This formula uses your Primary Insurance Amount (PIA) calculated in the previous step. This is the amount you will get if you start benefits at your Full Retirement Age (FRA). Your FRA can vary depending on the year you were born. For people born between 1943 and 1954, as in our example, the FRA is age 66.
For people born on Jan. 1, the FRA is based on the year prior. Someone born on Jan. 1, 1955, will have an FRA based on 1954.
A reduction is applied to your PIA if you begin benefits before your FRA. A credit, referred to as a delayed retirement credit, is applied if you begin benefits after your FRA.
Beginning Benefits Before FRA
If you choose to begin benefits before you reach full retirement age, one or both of the following calculations apply:
- 5/9 of 1%: Your benefits are reduced by 5/9 of 1% per month, up to a maximum of 36 months, depending on how many months you have until you reach FRA.
- 5/12 of 1%: If you are more than 36 months away from reaching FRA, the reduction above is applied, and then for the number of months greater than 36, the benefit is further reduced 5/12 of 1% per month.
Therefore, if your FRA is age 66, your benefits would be reduced by 25% if you begin taking them at age 62. Find that figure by taking 5/9 of 1%, or 0.56; multiply by 36 months to get 20%. Then, 5/12, or 0.42, multiplied by the remaining 12 months is 5% for a total of 25%.
Credit for Taking Benefit Later Than FRA
If you were born in 1943 or later, your benefits will increase 2/3 of 1% per month, or 8% a year, for each month that you are past your FRA when you begin benefits. Survivor benefits for a widow or widower will also receive these delayed retirement credits.
Therefore, If your FRA is 66, your benefits would be increased by 32% by waiting until age 70 to begin (8% per year times four years).
How Inflation Impacts Your PIA
Your PIA is calculated at age 62. If you wait beyond age 62, cost of living adjustments (COLA) will be applied to your PIA for each year afterward.
If you have already had most of your 35 years of earnings, and you are near 62 today, the age 70 benefit amount you see on your Social Security statement will likely be higher due to these cost of living adjustments. Many people do not account for this when doing their own calculations, which can lead them to think taking Social Security early is a better deal, when oftentimes waiting is the better deal.
In the table below, our hypothetical worker, born in 1954, is eligible for full retirement at age 66. The column on the right shows the effect of inflation for waiting beyond age 62 to take their benefits.
|Effect of Age on Claiming Benefits|
|Year||Age||Year||PIA in today's dollars||PIA with 2% inflation|