Demystifying Your Social Security Benefit - AMAC Foundation
Your Social Security Benefit
Winston Churchill famously described the Soviet Union as “a riddle inside an enigma wrapped in a mystery.” That is also an apt way to describe your Social Security benefit, or so it seems when trying to understand how your personal Social Security benefit is computed. Let’s unwrap this mystery.
There are only two key things which determine what your Social Security benefit will be:
- The average amount of money you earned each month over your lifetime, and,
- How old you are when you claim benefits.
Well, it’s not truly that simple because there are some variations and special rules which apply to both, so let’s expand just a little on these two key things.
Your Lifetime Average Monthly Earnings
Social Security defines your “lifetime” as thirty-five years to compute your benefit amount. If you have more than 35 years of earnings, they’ll choose the ones in which you had the highest earnings. And if you have less than 35 years of earnings, they will still use 35 and fill in $0 (zero) earnings enough times to make it thirty-five. The benefit formula always uses thirty-five years.
Now, it wouldn’t be fair to use actual dollar amounts from your early years to compute today’s benefit because your benefit would be much smaller. So Social Security adjusts your earnings in each prior year for inflation (this is known as “indexing”), and that means your benefit will be computed using today’s dollar-equivalent of your prior year’s earnings. It would be similarly unfair to compute your benefit from earnings you didn’t pay Social Security payroll tax on, so only earnings up to the payroll tax cap for each year are used.
When all 35 years of your “indexed” earnings are added up, your “Average Indexed Monthly Earnings,” or “AIME,” is determined. Your AIME is then subjected to a formula[1] which arrives at your “Primary Insurance Amount,” or “PIA.” Your PIA is the benefit you get in the month you reach your Full Retirement Age (FRA).
How Old You Are When You Claim Benefits
As mentioned above, you get your total PIA in the month you reach your full retirement age. If you claim any earlier than your full retirement age, your monthly benefit amount will be permanently reduced, and if you wait beyond your full retirement age to claim you will get more than your PIA by earning Delayed Retirement Credits (DRCs). DRCs can be earned up to age 70 when your maximum Social Security benefit is attained.
To illustrate: those with a full retirement age of 67 who claim Social Security at age 62 will get only 70% of the benefit available at their FRA. But if they wait until 70 years of age to claim they will get 24% more than their PIA. Someone who claims at age 70 gets about 75% more benefit than they would get by claiming at age 62. The age at which your Social Security benefit is claimed greatly affects how much your benefit will be. There are, of course, many other Social Security rules such as how you become entitled to benefits in the first place, the age at which they become available, and myriad other topics. Answers to all your questions about Social Security are available from The AMAC Foundation’s Social Security Advisory Service, which can be reached by calling 1.888.750.2622 or via email at SSAdvisor@amacfoundation.org
[1] The formula breaks your AIME into three parts. A percentage of each part (90%, 32% and 15% respectively) is used to determine your PIA. The formula is weighted to replace a higher percentage of pre-retirement income for those with lower lifetime earnings.
Also, if you’re unsure about how these basics apply to you, or if you have any questions about your individual situation under Social Security, note that the AMAC Foundation provides a free-to-the-public advisory service to help Americans navigate the complexities of this program. All questions are answered quickly, at no charge. Learn more about it here…