How To Calculate Social Security Benefits: A Step-by-Step Guide

A hands-on guide to running the numbers behind your Social Security.

Image shows an older woman working at a computer with paperwork and a calculator. Text reads: "4 factors for determining social security benefits: how long you work, how much you make every year, inflation, what age you begin taking your benefits."

The Balance / Emilie Dunphy

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
  • Inflation
  • 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.

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

Your earnings history is shown on your Social Security statement, which you can now get online.

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.

Example:

  • 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
A B C D E F G H
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
1971 18 1000 6497.08 6.909 6909 N/A 7800
1972 19 2000 7133.8 6.292 12586 N/A 9000
1973 20 3000 7580.16 5.922 17766 N/A 10800
1974 21 4000 8030.76 5.590 22360 N/A 13200
1975 22 5000 8630.92 5.201 26010 N/A 14100
1976 23 6000 9226.48 4.865 29196 N/A 15300
1977 24 7000 9779.44 4.590 32137 N/A 16500
1978 25 8000 10556.03 4.252 34024 N/A 17700
1979 26 9000 11479.46 3.910 35199 N/A 22900
1980 27 10000 12513.46 3.587 35872 35872 25900
1981 28 11000 13773.10 3.259 35850 35850 29700
1982 29 18000 14531.34 3.089 55603 55603 32400
1983 30 20000 15239.24 2.946 58911 58911 35700
1984 31 21000 16135.07 2.782 58423 58423 37800
1985 32 22000 16822.51 2.668 58703 58703 39600
1986 33 23000 17321.82 2.591 59603 59603 42000
1987 34 24000 18426.51 2.436 58466 58466 43800
1988 35 25000 19334.04 2.322 58043 58043 45000
1989 36 25000 20099.55 2.233 55832 55832 48000
1990 37 25000 21027.98 2.135 53367 53367 51300
1991 38 27000 21811.60 2.058 55666 55666 53400
1992 39 29000 22935.42 1.957 56757 56757 55500
1993 40 30000 23132.67 1.940 58214 58214 57600
1994 41 36000 23753.53 1.890 68031 68031 60600
1995 42 37000 24705.66 1.817 67226 67226 61200
1996 43 38000 25913.90 1.732 65824 65824 62700
1997 44 39000 27426.00 1.637 63831 63831 65400
1998 45 40000 28861.44 1.555 62212 62212 68400
1999 46 41000 30469.84 1.473 60401 60401 72600
2000 47 42000 32154.82 1.396 58632 58632 76200
2001 48 40000 32921.92 1.363 54539 54539 80400
2002 49 40000 33252.09 1.350 53997 53997 84900
2003 50 40000 34064.95 1.318 52709 52709 87000
2004 51 43000 35648.55 1.259 54145 54145 87900
2005 52 45000 36952.94 1.215 54663 54663 90000
2006 53 46000 38651.41 1.161 53423 53423 94200
2007 54 48000 40405.48 1.111 53325 53325 97500
2008 55 50000 41334.97 1.086 54298 54298 102000
2009 56 44000 40711.61 1.103 48514 48514 106800
2010 57 44000 41673.83 1.077 47394 47394 106800
2011 58 46000 42971.61 1.045 48052 48052 106800
2012 59 48000 44321.67 1.013 48614 48614 110100
2013 60 45000 44888.16 1 45000 45000 113700
2014 61 45000 44888.16 1 45000 45000 117000
2015 62 - 44888.16 1     118500
          TOTAL 1,919,040 ($4,569/mo.)  

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
Excess N/A .15 0
Sum     1,941.20
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:

  1. 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.
  2. 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
2013 60 2013 N/A N/A
2014 61 2014 N/A N/A
2015 62 2015 $1,455.99 $1,456
2016 63 2016 $1,553.06 $1,584
2017 64 2017 $1,682.48 $1,750
2018 65 2018 $1,811.90 $1,923
2019 66 2019 $1,941.32 $2,101
2020 67 2020 $2,096.63 $2,315
2021 68 2021 $2,264.36 $2,550
2022 69 2022 $2,445.50 $2,809

Article Sources

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  2. Social Security. “Frequently Asked Questions.” Accessed Jan. 15, 2021.

  3. Social Security. “Average Wage Indexing (AWI) Series.” Accessed Jan. 15, 2021.

  4. Social Security. “Indexing Factors for Earnings.” Accessed Jan. 15, 2021.

  5. Social Security. “Social Security Benefit Amounts.” Accessed Jan. 15, 2021.

  6. Social Security. “Distributional Effects of Increasing the Benefit Computation Period.” Accessed Jan. 15, 2021.

  7. Social Security. “Benefit Formula Bend Points.” Accessed Jan. 15, 2021.

  8. Social Security. “Primary Insurance Amount.” Accessed Jan. 15, 2021.

  9. Social Security. “Cost-of-Living Adjustment (COLA) Information.” Accessed Jan. 15, 2021.

  10. Social Security. “Benefits Planner: Survivors | If You Are the Survivor.” Accessed Jan. 15, 2021.

  11. Social Security. “Benefits Planner: Retirement.” Accessed Jan. 15, 2021.

  12. Social Security. “Full Retirement Age.” Accessed Jan. 15, 2021.

  13. Social Security Online. “Early or Late Retirement?” Accessed Jan. 15, 2021.

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  15. Social Security. “Old Age and Survivor's Insurance.” Accessed Jan. 15, 2021.

  16. Social Security. ”Application of COLA to a Retirement Benefit.“ Accessed Jan. 15, 2021.

  17. Social Security. “Latest Cost-of-Living Adjustment.” Accessed Jan. 15, 2021.