How are Social Security benefits calculated?
The Social Security Administration uses a formula to calculate how much each recipient will receive once they begin claiming benefits. Here’s a look…
There are over 68 million Americans that receive Social Security payments every month, the vast majority, 51 million, are receiving retirement benefits. The amount that each recipient receives is specific to them and is based on a number of factors, including the age when the recipient begins to claim benefits and earnings history.
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 $160,200 (as of 2023).
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 $1,115 of your AIME;
- 32% of any amount over $1,115 up to $6,721;
- and 15% of any amount over $6,721
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.
Those who are considering early retirement should be aware that their Medicare benefits will not kick in until sixty-five, meaning that they will have to purchase insurance during the in-between period.
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.