Definition Time: “Computational Years” and How They Affect Benefits - AMAC Foundation
Social Security retirement benefits are based on earnings history, currently using 35 “computation years” to develop an average indexed monthly earnings (AIME) figure for use as the base for determining a retiree’s primary insurance amount (PIA). AIME represents the retirees’ average monthly earnings, adjusted for wage inflation over the course of a career. The PIA is the retiree’s base benefit amount at normal retirement age.
These computation years are the highest wage-indexed earning years in the worker’s history. Since Social Security generally assumes a theoretical 40-year work history as the norm, taking fewer than 40 earnings years effectively “drops out” five lower-earning years, thereby increasing the AIME. Conversely, adding computation years adds additional lower-earnings years to the calculation, thereby reducing AIME.
The Theory Behind Changing Computation Years
A change to the AIME calculation that includes additional years is considered more reflective of 21st-century earnings histories. The current 35-year parameter theoretically assumes a workforce participation age range of 25 to 60; with the 1983 NRA change to 66-67 and an increasing number of workers remaining on the job into their 70s, adopting a 25-65 employment workforce participation age range is more in line with current economics.
Many proposals to address Social Security’s long-term financial problems by increasing the number of years in the initial benefit calculation have been evaluated by the Administration’s actuaries, and it has been determined that this approach would significantly reduce program outlays. One drawback, however, is that increasing the number of years to calculate average indexed monthly earnings would likely cause lower-income workers, especially those with zero earnings years in their work history, to see their monthly benefit drop substantially. Consequently, implementing a change of this nature would need to ensure that Social Security’s progressive methodology retains the basic premise of “keeping seniors out of poverty” by focusing the calculation change on those with higher benefit amounts and lower income replacement rates.