SOCIAL SECURITY

How are Social Security benefits calculated and on how many years of work are they based?

The Social Security Administration provides monthly payments for more than 65 million Americans, each of whom gets a personalised benefits entitlement.

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How are Social Security benefits calculated and on how many years of work are they based?

In June 2021 more than 65 million Americans were in receipt of Social Security benefit payments, either due to qualifying as a retired worker, a disabled worker, or a survivor.

More than $1 trillion is expected to be sent out by the Social Security Administration (SSA) over the course of the year and the amount each recipient gets is a highly-personalised calculation.

In 2021 the average monthly retirement benefits is $1,543, but these payments can be as high as $3,148 for someone who filed recently at full retirement age. Here’s how to work out your Social Security entitlement…

How are Social Security payments calculated?

The SSA bases the Social Security entitlement on data gathered throughout your working life which is formed into an earnings record. This information is than used, with a three-part process, to calculate the size of payments:

Average Indexed Monthly Earnings (AIME) – The SSA uses your 35 best-paid years to calculate your AIME, which is essentially a snapshot of your historical earnings. The more you earn the higher your monthly entitlement can be, up to a maximum threshold of $142,800 (as of 2021).

Primary Insurance Amount (PIA) – Assuming that you wait until full retirement age (currently 66 years and two months) before claiming Social Security, your PIA is the amount you’ll receive each month from the SSA.

Your PIA is comprised of

  • 90% of the first $996 of your AIME;
  • 32% of any amount over $996 up to $6,002;
  • and 15% of any amount over $6,002

Age of claim – If you decide to claim Social Security before you reach full retirement age the size of your monthly entitlement will decrease. This is done on a sliding scale, with more than a quarter of the payment size being lost if you claim at the age of 62. Alternatively, if you delay the payment until you are 70 you can add up to 30% to your payment amount.

How to calculate your Social Security entitlement

The process for calculating your Social Security monthly payments can be a confusing one and picking the opportune moment to claim the benefits can be crucial for your long-term financial stability.

Fortunately, the SSA provide two easy-to-use online tools which allow you to check both the earnings history and estimate your future Social Security entitlement.

The first is your Social Security Statement, which allows anyone over the age of 18 to see the current situation. The statement can be access through a mySocialSecurity account, and lists how much you have paid in so far, your current AIME and other important financial details.

The second is the Retirement Estimator, which uses your actual Social Security earnings record to calculate what your monthly payments could be when you decide to claim. However bear in mind that this is just an estimate and could vary if there are changes to your personal situation or the Social Security benefits programme.