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Nuances of Social Security’s Benefit Computation Process
The mathematical rules associated with determining initial monthly Social Security benefits are often subject to informal discussion, with many “experts” weighing in on how it really works. Some say it’s based on the most recent five years of work, some say 10, some say it’s an average of all of one’s work history. So, what’s the real story? In a dallasnews.com post, retired Social Security official Tom Margenau sets the record straight by addressing several questions on the calculation process.
In his examples, Margenau touches on an intriguing aspect of the benefit calculation process — the parameter called computational years. 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). The PIA is the 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 40-year work history as the norm, taking a lower number of earnings years in effect “drops out” five lower-earning years, resulting in a higher AIME.
A change in the calculation of benefits to include additional years in the PIA calculation would be more reflective of 21st-century earnings histories. With respect to the calculation of benefits, however, the additional years would be years of lower earnings, thus reducing the AIME and, of course, the resulting PIA.
This area of Social Security’s rulebook can be a bit confusing; we recognize that. So, if you need additional help to understand the process, know that the AMAC Foundation offers a free-to-the-public Social Security Advisory service that can assist you. Click here to learn more about this service and how to access it.