How the Social Security Benefits Calculation Works

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." — Photo:
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.

Key Takeaways

Your Social Security benefit is decided based on your lifetime earnings and the age when 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.

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 when you will begin receiving 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. It 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 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.

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 years you are indexing, and multiply your included earnings by that 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 income 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.

Note

Because of how the wage indexing formula works, if you are not yet age 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 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
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	1,000	6,497.08	6.909	6,909	N/A	7,800
1972	19	2,000	7,133.8	6.292	12,586	N/A	9,000
1973	20	3,000	7,580.16	5.922	17,766	N/A	10,800
1974	21	4,000	8,030.76	5.590	22,360	N/A	13,200
1975	22	5,000	8,630.92	5.201	26,010	N/A	14,100
1976	23	6,000	9,226.48	4.865	29,196	N/A	15,300
1977	24	7,000	9,779.44	4.590	32,137	N/A	16,500
1978	25	8,000	10,556.03	4.252	34,024	N/A	17,700
1979	26	9,000	11,479.46	3.910	35,199	N/A	22,900
1980	27	10,000	12,513.46	3.587	35,872	35,872	25,900
1981	28	11,000	13,773.10	3.259	35,850	35,850	29,700
1982	29	18,000	14,531.34	3.089	55,603	55,603	32,400
1983	30	20,000	15,239.24	2.946	58,911	58,911	35,700
1984	31	21,000	16,135.07	2.782	58,423	58,423	37,800
1985	32	22,000	16,822.51	2.668	58,703	58,703	39,600
1986	33	23,000	17,321.82	2.591	59,603	59,603	42,000
1987	34	24,000	18,426.51	2.436	58,466	58,466	43,800
1988	35	25,000	19,334.04	2.322	58,043	58,043	45,000
1989	36	25,000	20,099.55	2.233	55,832	55,832	48,000
1990	37	25,000	21,027.98	2.135	53,367	53,367	51,300
1991	38	27,000	21,811.60	2.058	55,666	55,666	53,400
1992	39	29,000	22,935.42	1.957	56,757	56,757	55,500
1993	40	30,000	23,132.67	1.940	58,214	58,214	57,600
1994	41	36,000	23,753.53	1.890	68,031	68,031	60,600
1995	42	37,000	24,705.66	1.817	67,226	67,226	61,200
1996	43	38,000	25,913.90	1.732	65,824	65,824	62,700
1997	44	39,000	27,426.00	1.637	63,831	63,831	65,400
1998	45	40,000	28,861.44	1.555	62,212	62,212	68,400
1999	46	41,000	30,469.84	1.473	60,401	60,401	72,600
2000	47	42,000	32,154.82	1.396	58,632	58,632	76,200
2001	48	40,000	32,921.92	1.363	54,539	54,539	80,400
2002	49	40,000	33,252.09	1.350	53,997	53,997	84,900
2003	50	40,000	34,064.95	1.318	52,709	52,709	87,000
2004	51	43,000	35,648.55	1.259	54,145	54,145	87,900
2005	52	45,000	36,952.94	1.215	54,663	54,663	90,000
2006	53	46,000	38,651.41	1.161	53,423	53,423	94,200
2007	54	48,000	40,405.48	1.111	53,325	53,325	97,500
2008	55	50,000	41,334.97	1.086	54,298	54,298	102,000
2009	56	44,000	40,711.61	1.103	48,514	48,514	106,800
2010	57	44,000	41,673.83	1.077	47,394	47,394	106,800
2011	58	46,000	42,971.61	1.045	48,052	48,052	106,800
2012	59	48,000	44,321.67	1.013	48,614	48,614	110,100
2013	60	45,000	44,888.16	1	45,000	45,000	113,700
2014	61	45,000	44,888.16	1	45,000	45,000	117,000
2015	62	-	44,888.16	1			118,500
					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 that, the formula uses what are called “bend points," which 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 $960 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.

Note

Technically, your PIA is calculated and rounded to the next lowest dime, and then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Next, 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 Administration's 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 years' 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			1,941.16
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 Administration's website.

Note

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.

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 when 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 will get more by waiting until a later age—as late as age 70—to 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 (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.

Note

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.

Beginning Benefits Before FRA

If you choose to begin to receive benefits before you reach your full retirement age, one or both of the following calculations will 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 by 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 Benefits Later Than FRA

If you were born in 1943 or later, your benefits will increase by 2/3 of 1% per month, or 8% per year, for each month that you are past your FRA when you begin to receive 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 (COLAs) 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 age 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 that taking Social Security early is a better deal, when waiting is often 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	$1,456	$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

How Do You Calculate Your Social Security Taxes?

"Social Security taxes" can refer to taxes paid into the Social Security system or taxes paid on Social Security benefits. The taxes that fund Social Security come from the payroll tax, which is 6.2% for employees or 12.4% for self-employed individuals.

When you're receiving Social Security benefits, you'll still have to pay income taxes, but you won't owe taxes on all of your benefits. Those whose total annual income tops $34,000 ($44,000 for those filing joint returns) will pay income tax up to 85% of their Social Security benefits. Otherwise, incomes between $25,000 to $34,000 may have to pay income tax on up 50% of their Social Security benefits.

How Do You Calculate Spousal Social Security Benefits?

Spouses who do not meet earnings requirements may receive up to 50% of their partner's PIA, but claiming benefits before reaching full retirement age can reduce this amount.

When Will I Receive My Social Security Check?

The Social Security Administration's payment calendar helps recipients plan for payments. If you were born in the first 10 days of your birth month, then you receive payments by the second Wednesday of the month. Those born on the 11th-20th receive payments by the third Wednesday. Those born from the 21st-31st receive payments by the fourth Wednesday. However, those who began receiving payments before May 1997 receive payments by the third day of each month.

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Sources

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