How are Social Security Benefits Calculated?

One of the most often asked questions about social security is this – How are Social Security Benefits Calculated? In this post, we are going to answer the question in detail, and show you how you can calculate how much benefits you are likely to get if you retire early at age 62, or wait till your full retirement age, or even at age 70.

We will explain the formula the Social Security Administration uses to calculate benefits, what PIA and AIME mean, and why claiming benefits early means you may get 25% less money than you are entitled to.

This post about “How are Social Security Benefits Calculated” will cover:

  • How are Social Security Benefits Calculated?
  • Social Security Benefits Formula
  • Claiming Social Security at 62
  • Claiming Social Security at Full Retirement Age
  • What is the Full Retirement Age?
  • When you start Drawing Benefits Matters
  • What is the Maximum Social Security Benefit?
  • Social Security Benefits Calculation FAQs

"How are Social Security Benefits Calculated"

 

How are Social Security Benefits Calculated?

When you work, you accumulate an earnings record, which forms the foundation the Social Security Administration uses to calculate your benefits. How much you eventually receive in Social Security benefits depends on four factors:

  • Your work history (if you worked the entire 35 years that is used to calculate your average income for benefits)
  • How much you earned while working
  • The age at which you start collecting Social Security benefit
  • Your full retirement age – which is based on the year you were born

Here’s how it works:

Social Security Benefits Formula

To calculate your benefit amount, Social Security looks at your entire work record. Here is how the Social Security benefits formula works:

First, every year’s earnings are indexed for inflation, and then the 35 highest are considered when calculating your benefit.

If you don’t have 35 years of earnings, zeros will be used for the remaining years.

Second, 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 (AIME).

Third, once your monthly average is determined, it is applied to this formula to determine your Primary Insurance Amount (PIA).

The PIA is the benefit a person would receive if he/she elects to begin receiving retirement benefits at his/her full retirement age (see table above).

At this age, the benefit is neither reduced for early retirement nor increased for delayed retirement.

The formula used to compute the PIA reflects changes in general wage levels, as measured by the national average wage index.

The Social Security Administration releases a table each year showing the dollar amounts that go into the PIA formula (called bend points).

Here is the PIA formula for benefit calculation for workers retiring in 2019 based on the 2019 bend points table:

  • 90% of the first $926
  • 32% of the amount above $926, but less than or equal to $5,583
  • 15% of the amount over $5,583

The sum of those three figures is your PIA, also known as your “full retirement benefit.”

For example, assuming that a person, Jane Doe, is first eligible for Social Security in 2019 and retires in 2019 and will start collecting benefits in 2019.

If she turns 62 in 2019 but decides not to start collecting benefits till say age 67 in 2024, the 2019 formula will still be used to calculate her benefit.

Once her benefit is calculated, the Social Security administration will add Cost of Living Adjustment increases (COLA) to her benefits until she starts collecting benefits, up to age 70.

However, any earnings between now and when she starts collecting benefits can be factored into determining her AIME, so her benefits may go up.

Here is an example of a PIA calculation using the formula:

Example 1 – Early Retirement: Claiming Social Security at 62

AIME is $4,197 and the worker is first eligible for benefits in 2019 (at 62).

Using the 2019 bend point table numbers, the dollar amounts in the PIA formula for 2019 are –

First – 926 and Second – 5,583.

We plug them into the formula above to calculate the PIA using the formula above.

.9(926) + .32(4197 – 926) = $1,880.12

If this worker retires at age 62 in 2019, it means they were born in 1957.

According to the Full Retirement Age (FRA) table below, their FRA is 66 years and 6 months.

This means that they will be 54 months away from their FRA if they retired at age 62.

Their benefit amount of $1,880.12 will then be reduced for 54 months of early retirement.

Therefore, the $1,880.10 PIA will be reduced to a monthly benefit of $1,363.00.

That’s a 27.50% reduction in benefits due to early retirement at age 62.

Example 2 – Claiming Social Security at Full Retirement Age 

AIME is $9,300 and the worker is first eligible for Social Security benefits in 2015 (at 62).

Using the 2015 bend point table numbers, the dollar amounts in the PIA formula for 2019 are –

First – 826 and Second – 4,980.

We plug them into the formula above to calculate the PIA using the formula.

.9(826) + .32(4980 – 826) + .15(9300 – 4980) = $2,720.68

Assuming this worker retired at their normal retirement age of 66 years in 2019, here is what their benefit amount will be, after adding COLA increases for 2016 through 2019.

Here are the COLA numbers for those years:

2016 – 0.0 percent

2017 – 0.3 percent

2018 – 2.0 percent

2019 – 2.8 percent

Adding these COLA increases, the worker’s benefits in 2019 will be $2,861.10.

The worker will, therefore, receive a Social Security benefit amount of $2,861.00 in 2019, rounding down to the next lower dollar.

What is the Full Retirement Age?

Full retirement age is the age at which a person may first become entitled to full or unreduced Social Security retirement benefits.

However, regardless of your full retirement age, you may start receiving benefits as early as age 62 or as late as age 70.

Under the original Social Security Act of 1935, workers had to reach age 65 to receive a full retirement benefit.

However, in 1983, Congress passed legislation to increase the full retirement age to 67.

This was to ensure that the Social Security trust fund does not run out of money.

It was also due to the fact that seniors were living longer, and thus collecting benefits over a longer period of time than when the Social Security Act was originally passed.

However, to make the change fair for seniors who were soon to retire, Congress decided to stretch the implementation over a 22-year period, with an 11-year hiatus at which the retirement age will remain at 66.

The table below shows the full retirement age based on the year you were born.

Full Retirement Age
Year of birth Age
1937 and prior 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-54 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

When you start Drawing Benefits Matters

When you start collecting Social Security benefits will determine if you are going to receive all the benefits you are entitled to.

You are allowed to start drawing Social Security benefits as soon as you become eligible, which is at age 62.

However, if you start collecting Social Security at age 62, you will get less than you would have received had you waited to draw benefits at your full retirement age (FRA).

In fact, you can lose more than a quarter of your benefits by starting Social Security at 62, the earliest possible age.

However, for each year you wait after your full retirement age and age 70, you add to your benefit for each month.

Therefore, the more you delay claiming benefits until age 70, the more money you will receive when you finally start collecting benefits.

You can gain as much as 32 percent extra in benefits this way.

The chart below lists age 62 reduction amounts and includes examples based on an estimated monthly benefit of $1000 at full retirement age.

Find your year of birth to find out how much your benefit will be reduced if you retire between age 62 and full retirement age.

At Age 62.
Year of Birth Full (normal) Retirement Age Months between age 62 and full retirement age A $1000 retirement benefit would be reduced to The retirement benefit is reduced by. A $500 spouse’s benefit would be reduced to The spouse’s benefit is reduced by.
1937 or earlier 65 36 $800 20.00% $375 25.00%
1938 65 and 2 months 38 $791 20.83% $370 25.83%
1939 65 and 4 months 40 $783 21.67% $366 26.67%
1940 65 and 6 months 42 $775 22.50% $362 27.50%
1941 65 and 8 months 44 $766 23.33% $358 28.33%
1942 65 and 10 months 46 $758 24.17% $354 29.17%
1943-1954 66 48 $750 25.00% $350 30.00%
1955 66 and 2 months 50 $741 25.83% $345 30.83%
1956 66 and 4 months 52 $733 26.67% $341 31.67%
1957 66 and 6 months 54 $725 27.50% $337 32.50%
1958 66 and 8 months 56 $716 28.33% $333 33.33%
1959 66 and 10 months 58 $708 29.17% $329 34.17%
1960 and later 67 60 $700 30.00% $325 35.00%

What is the Maximum Social Security Benefit?

The Social Security Administration uses a formula based on your average earnings over the course of your career to calculates how much you’ll be eligible to receive in benefits.

The calculation is done to show how much you will receive if you start claiming benefits at 62, at your Full Retirement Age (FRA) and at age 70.

The maximum Social Security benefit changes from year to year, based on factors like inflation.

According to the Social Security Administration (SSA) the maximum monthly Social Security benefit that an individual who files a claim for Social Security retirement benefits in 2020 can receive is as follows:

$3,770 for someone who files at age 70.
$2,861 for someone who files at full retirement age (currently 66).
$2,209 for someone who files at 62.

For comparison, the average Social Security retirement benefit in 2019 is $1,461 a month while the average Social Security disability benefit is $1,234.

Helpful Video

If you are still confused about how to calculate your Social Security benefit, the video below does a great job of explaining,

Social Security Benefits Calculation FAQs

Here are the most frequently asked questions about Social Security Benefits Calculation

Can I Get Social Security Before my Full Retirement Age?

Yes, you can choose to get your Social Security benefits before your full retirement age.
You can begin to receive Social Security benefits as early as age 62, but at a reduced rate.

When you collect benefits early, say at age 62, the SSA reduces your benefits a certain percentage compared to what you will receive if you had waited and collected benefits at your full retirement age.

Can I delay collecting Social Security Past my Full Retirement Age?

Yes, you can delay your retirement past your full retirement age. If you delay receiving Social Security benefits until after your full retirement age, Social Security will increase your benefit amount until you start collecting benefits, or until you reach age 70.

When does COLA Increases Kick-in?

You are eligible for a cost-of-living adjustment (COLA) benefit increases starting with the year you become age 62.

You will still get COLA increases on your benefits even if you delay receiving benefits until your full retirement age or even age 70.

The Social Security Administration will add cost-of-living increases to your benefit beginning with the year you reach 62, and up to the year you start receiving benefits.

How are Social Security Benefits Calculated Summary

We hope this post on “How are Social Security Benefits Calculated?” was helpful.

If you have further questions about Social Security retirement benefits, please let us know in the comments section below.

Be sure to check out our other articles on Social Security including What your full retirement age is, Social Security COLA Increase 2020, How to Create a mySocialSecurity Account, Social Security payments Schedule – 2020, and Social Security Questions and Answers.

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