Social Security Report

A Frequent Question: How Did SSA Determine My Social Security Retirement Benefit? - AMAC Foundation

One of the more frequently misunderstood items we encounter here at the AMAC Social Security Advisory Service is the belief that retirement benefits are based on one’s last 5 years of earnings. Some say the last 10 years, and some even maintain that the replacement rate—that is, the portion of your earnings that will be replaced by Social Security—is based on your last full year of reported earnings. None of these scenarios is true, or even close to the reality of how benefits are determined.

The Reality of the Benefit Calculation

Here’s how it actually works. Each year after your federal income tax return is filed, the IRS forwards your earnings record to the Social Security Administration (SSA), where the information is stored in your individual work record. If you had no earnings on which you paid Social Security tax (called payroll tax or, officially, FICA tax), your recorded earnings would be zero for that year.

When you reach age 62, SSA takes all of the years of earnings information in your work record and indexes them to adjust for inflation. This indexing process, which is designed to equate your historical earnings to present-day values, uses the National Average Wage Index for the year you turned 60 and compares this factor to each year of your earnings up to that point to ensure that the prior years take inflation into consideration. (The earnings between age 60 and 62, incidentally, are taken at nominal value.)

Here’s a quick example of the math: someone born in 1962 and earning $21,986 in 1992 would have their 1992 earnings multiplied by 2.78, meaning they would be equal to $61,121 in current dollars.

Fun With Numbers

So, after indexing all the records in your work history, SSA then adds them together and selects the highest 35 years of indexed earnings. The highest 35 earnings figures are then added together and divided by 420—the number of months in 35 years—to produce an average monthly figure, referred to as AIME, or your Average Indexed Monthly Earnings.

More Fun With Numbers

That completes the first major step in the process, but it’s not over yet. The next step is to calculate your Primary Insurance amount (PIA), which is the benefit a person would receive if he/she elects to begin receiving retirement benefits at their normal retirement age. To determine PIA, SSA takes your AIME figure and breaks it into three segments, with each segment multiplied by a different percentage.

Using 2026 parameters, your PIA will be the sum of:

(a) 90 percent of the first $1,286 of your average indexed monthly earnings, plus

(b) 32 percent of your average indexed monthly earnings over $1,286 and through $7,749, plus

(c) 15 percent of your average indexed monthly earnings over $7,749.

Here’s an example of the math, using a hypothetical AIME of $8,000:          

The final step in this part of the process is to round the calculated amount down to the lowest whole dollar, as shown in the last row above.

In terms of income replacement rates, note also that this example illustrates a replacement rate of 40.8%. (or, $3,263 divided by $8,000).

Here’s another example, using a lower AIME:

In this example. There are only two segments in the PIA calculation because the second segment is less than the $7,749 applicable to that segment, and of course there is no third step in the calculation. Note also that the replacement rate is 69.3% ($1,385 divided by $2,000), illustrating the progressive nature of Social Security benefits. The worker with the lower earnings history—the lower AIME—ends up with a higher income replacement rate than the worker with an AIME of $8,000.

And It doesn’t Necessarily End There!

The above explanation addresses the calculation of your full retirement benefit…100% of the monthly benefit you’d receive at full retirement age. But what if you’re filing before reaching that point? In that case the calculated benefit is reduced reduced 5/9 of one percent for each month before full retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month. With a full retirement age of 67, claiming at age 62 will reduce your monthly benefit by 30%.

Conversely, delayed retirement credit is generally given for claiming benefits after the normal retirement age. That credit currently is 8% annually, or 2/3 of one percent per month for each month your claim is deferred. Waiting until age 70, then, will increase your benefit by 24%.