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Formula For Social Security Benefit

Policy Basics: Top Ten Facts About Social Security

How to Calculate Your Social Security Benefits

Social Security provides a foundation of income on which workers can build to plan for their retirement. It also provides valuable social insurance protection to workers who become disabled and to families whose breadwinner dies.

Eighty-six years after President Franklin Roosevelt signed the Social Security Act on August 14, 1935, Social Security remains one of the nations most successful, effective, and popular programs.

List Each Year’s Earnings

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

In the table below, sample 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.

Do You Expect To Live A Long Life

Many people live longer than they expect.

Because Social Security provides guaranteed income for life, it’s especially valuable to you when you reach age 80 and beyond. Claiming benefits at your full Social Security benefit age or later could be a good way to secure your monthly income during your later years. Your benefit increases the longer you wait to claim, up to age 70, and is adjusted annually with the cost of living. If you live into your 80s but claim at age 62 instead of your full retirement age or later, your total lifetime benefits will be lower by thousands of dollars.Calculate your expected longevity.

Claiming at your full benefit age could still make sense for you.

We understand it’s difficult to make predictions. You may want to plan for the possibility that you may spend 20 or more years in retirement. On average, a woman reaching age 65 today will live to age 87, and a man will live to age 84. Waiting to claim as long as you can could still make sense for you if you are married, are the higher earner in the household, and want your surviving spouse to keep the highest monthly benefit after you die. Remember, you can claim at any point between age 62 and 70. Each additional month that you wait to claim gives you a permanent increase in your monthly benefit which becomes more valuable as you age.Calculate your longevity.

There’s a good chance that you’ll live into your 80s and beyond.

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The Formula Social Security Uses To Calculate Your Benefits

Social Security benefits are earned benefits based on your wages over the course of your career. So it’s no surprise the Social Security benefits formula takes your earnings into account. Specifically, when your benefit is calculated:

  • The Social Security Administration adjusts your wages over your career to account for wage growth. You get credit for wages up to an annual “wage base limit.” In 2022, the wage base limit is $147,000.
  • Then, your Average Indexed Monthly Earnings is calculated based on average monthly earnings during the 35 years when your wages were highest

You will then receive benefits equal to a percentage of your AIME. The specific percentage depends on what you earn. Specifically, you receive:

  • 90% of AIME up to a first “bend point”
  • 32% of AIME up to a second “bend point”
  • 15% of AIME up to a third “bend point”

The bend points are income levels based on average monthly earnings. They change annually, and the ones that apply to you are those in effect when you turn 62. For anyone turning 62 in 2022, the first bend point is $1,024, and the second is $6,172.

So, if your average monthly earnings in the 35 years you earned the most were $7,000, you would receive 90% of your earnings up to $1,204, 32% of your earnings between $1,024 and $6,172, and 15% of your earnings in excess of that amount, so 15% of $828.

Restrictions On Potentially Deceptive Communications


Because of the importance of Social Security to millions of Americans, many direct-mail marketers packaged their mailings to resemble official communications from the Social Security Administration, hoping recipients would be more likely to open them. In response, Congress amended the Social Security Act in 1988 to prohibit the private use of the phrase “Social Security” and several related terms in any way that would convey a false impression of approval from the Social Security Administration. The constitutionality of this law was upheld in United Seniors Association, Inc. v. Social Security Administration, 423 F.3d 397 , cert den 547 U.S. 1162 126 S.Ct. 2346 .

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How Social Security Is Calculated Summary

Heres the bottom line about how Social Security is Calculated:

Every years earnings are indexed for inflation, and then the 35 highest are considered when calculating your benefit.

Next, the 35 highest inflation-adjusted years are added together and averaged, to arrive at your lifetime average Social Security earnings.

This amount is divided by 12 to determine your Average Indexed Monthly Earnings .

Lastly, once your monthly average is determined, it is applied to this formula to determine your Primary Insurance Amount .

Fact #: Social Security Lifts Millions Of Older Adults Above The Poverty Line

Without Social Security benefits, about 4 in 10 adults aged 65 and older would have incomes below the poverty line, all else being equal, according to official estimates based on the 2021 Current Population Survey. Social Security benefits lift more than 16 million older adults above the poverty line, these estimates show.

An important study on retirement income from the U.S. Census Bureau that matches Census estimates to administrative data suggests that the official estimates overstate older people’s reliance on Social Security. The study finds that in 2012, 3 in 10 older adults would have been poor without Social Security, and that the program lifted more than 10 million older adults above the poverty line.

No matter how it is measured, its clear that Social Security lifts millions of older adults above the poverty line and dramatically reduces their poverty rate.

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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 when you begin benefits.

The earliest you can begin retirement benefits is age 62 . You will get more by waiting until a later ageas late as age 70to begin receiving 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 calculated in the previous step. This is the amount you will get if you start benefits at your full retirement age . 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 January 1, the FRA is based on the year prior. Someone born on January 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 to receive benefits after your FRA.

How To Calculate Your Social Security Benefits: A Step

Calculating Social Security Spousal Benefits with Dual Entitlement

Its important for you to have a clear understanding of the process used to calculate your Social Security benefits. If you understand this calculation, you may be able to spot mistakes and fix them before its too late.

Like anything with Social Security, the rules can seem complex at first. But once you get under the surface, they are actually pretty easy to understand. To help you, I distilled the several pages of calculation rules down into four easy-to-understand steps.

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Is There A Maximum Benefit

Yes, there is a limit to how much you can receive in Social Security benefits. The maximum Social Security benefit changes each year. For 2022, itâs $4,194/month for those who retire at age 70 . Multiply that by 12 to get $50,328 in maximum annual benefits. If that’s less than your anticipated annual expenses, youâll need to have additional income from your own savings to supplement it.

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 that amount 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

Also Check: Social Security Disability Benefit Amount

What If I Take Benefits Early

If you choose to take your own Social Security benefit before your full retirement age, be aware that the benefit is permanently reduced by five-ninths of 1% for each month. If you start more than 36 months before your full retirement age, the worker benefit is further reduced by five-twelfths of 1% per month for the rest of retirement.

For example, let’s assume you stop working at age 62. If your full retirement age is 67 and you elect to start benefits at age 62, the reduced benefit calculation is based on 60 months. So, the reduction for the first 36 months is 20% and then another 10% for the remaining 24 months. Overall, your benefits would be permanently reduced by 30%.

Can Your Pia Change After You Reach Age 62

7. Monthly Social Security Benefits Monthly Benefi...

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 Administration’s website.
  • You may get the wrong answer when 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.

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    What If I Delay Taking My Benefits

    If you retire sometime between your full retirement age and age 70, you typically earn a “delayed retirement” credit for your own benefits . For example, say you were born in 1960, and your full retirement age is 67. If you start your benefits at age 69, you would receive a credit of 8% per year multiplied by two . This means your benefit would be 16% higher than the amount you would have received at age 67.

    Do You Expect To Have Additional Sources Of Retirement Income Beyond Social Security

    Continue saving in the coming years.

    Social Security won’t replace all of your pre-retirement income. On average, Social Security replaces 40 percent of a worker’s income. That means your retirement savings, pension, 401, or Individual Retirement Account will need to fill the gap. Claiming at your full Social Security benefit age or later can minimize this gap and maximize your monthly benefit. If you claim before your full retirement age, your monthly benefit could be reduced by as much as 30 percent.Learn more about saving for retirement.

    You have an opportunity to continue growing your money.

    If you can, get the highest monthly Social Security benefit possible by claiming at your full Social Security benefit age or later. If you claim before your full retirement age, your monthly benefit could be permanently reduced by as much as 30 percent. Also, take advantage of catch-up contributions to your 401 or Individual Retirement Account . Lastly, avoid losing your retirement savings to unnecessary tax penalties. If you withdraw your 401 or IRA savings before age 59½, you will likely face an early withdrawal penalty.Learn more about how retirement savings grow.

    It’s a perfect time to start saving.

    It’s never too late to start saving!

    There are many ways to plan for a secure retirement outside of Social Security.

    It’s never too late to start saving!

    A type of retirement savings account offered by employers to help their employees save for retirement.

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    How About Prescription Drug Costs Under Medicare They Eat Into Social Security Benefits

    Most seniors prescription drugs are covered through Medicare Part D, and that program has not had a cap on the amounts that beneficiaries must pay out of pocket after deductibles are met. That can be a hardship for older people with very high drug costs. In 2020, 1.4 million Part D enrollees spent $2,000 or more out of pocket on drugs, according to the Kaiser Family Foundation.

    The climate and health care bill that President Biden signed into law in August aims to start curbing those costs with a series of changes that will start phasing in next year.

    In 2023, the Inflation Reduction Act curbs the soaring cost of insulin with a $35 monthly cap for Medicare enrollees. Also starting next year, drug makers will pay penalties for any price increase on a drug that exceeds the rate of general inflation.

    The legislation takes a two-stage approach to capping total out-of-pocket costs. In 2024, Medicares requirement that enrollees pay 5 percent coinsurance above the Part D catastrophic threshold will be eliminated. That will provide important relief to retirees who now pay 5 percent of the cost of very expensive drugs for conditions such as cancer, diabetes, rheumatoid arthritis and atrial fibrillation. And starting in 2025, a $2,000 total out-of-pocket cap takes effect.

    The large COLA will push some retirees over income thresholds that require them to pay income taxes on part of their Social Security benefit.

    Does The Social Security Cola Formula Accurately Measure Inflation For Retirees

    Computation Years: Social Security Benefits Calculation

    Yes and no.

    The COLA formula is based on a broad measure compiled by the Labor Department known as the C.P.I.-W., which reflects price changes for a group of goods and services bought by working people, not retirees. Inflation affects retirees differently they tend to spend more on health care and housing and less on food, beverages and transportation.

    Policy experts have debated proposals to replace the C.P.I.-W. with an alternate measure that aims to gauge the inflation experienced by seniors more accurately. That one, the C.P.I.-E. , has sometimes run about two-tenths of a percentage point higher than the C.P.I.-W. a meaningful difference as it compounds over many years of retirement. However, the C.P.I.-E. would not always yield a higher COLA. For example, the 5.9 percent COLA awarded for 2022 would have been 4.8 percent had C.P.I.-E. been in use, according to data from the Center for Retirement Research at Boston College.

    And the difference between the two measures has been shrinking. The C.P.I.-E. has been tracked since 1983, and during its first 20 years, it rose almost 0.4 percentage points per year faster than the C.P.I.-W., according to the center. But in the last 20 years, the gap declined to 0.05 percentage points.

    The cost of medical care has been rising at a slower rate. At the same time, transportation costs have been rising more quickly but this is a category where older people are less affected, since they travel less.

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    Private Retirement Savings Crisis

    While inflation-adjusted stock market values generally rose from 1978 to 1997, from 1998 through 2007 they were higher than in March 2013. This has caused workers’ supplemental retirement plans such as 401s to perform substantially more poorly than expected when current retirees were investing the bulk of their savings in them. In 2010, the median household retirement account balance for workers aged 55 to 64 was $120,000, which will provide only a trivial supplement to Social Security benefits, but about a third of households had no retirement savings at all. 75% of Americans nearing retirement age had less than $30,000 in their retirement accounts, which Forbes called “the greatest retirement crisis in American history.”

    Has There Always Been An Annual Social Security Cola

    The first automatic annual adjustment was paid in 1975, the result of legislation passed by Congress in 1972. Before that, COLAs were awarded periodically by lawmakers, generally in large amounts. For example, there was a 10 percent increase in 1971, a 20 percent increase in 1972 and two increases in 1974 totaling 18 percent.

    The move to an automatic COLA reflected bipartisan agreement, said Nancy Altman of Social Security Works and a historian of the program.

    Some progressives didnt like the lag effect, where inflation could be rising but people might wait two years to get an adjustment, and some conservatives didnt like the politics, where there might be a COLA that was larger than the actual rate of inflation, she said.

    William Arnone of the National Academy of Social Insurance thinks the large COLA for 2023 could become a political issue this fall. Democrats could try to leverage it, especially with the one-two punch of the Part B premium going down, he said.

    By contrast, he notes that two Republican senators, Ron Johnson of Wisconsin and Rick Scott of Florida, have suggested that Social Security and Medicare should be eliminated as federal entitlement programs and instead should be approved annually by Congress.

    It could be a sleeper issue in the midterm elections, Mr. Arnone said.

    President Biden signaled as much last month when he warned that Republicans posed a threat to Social Security and Medicare, citing the proposals made by the two senators.


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