Throughout your working life, you accumulate an earnings record (sometimes called a “work record”). That’s the foundation the Social Security Administration uses to calculate your benefits, using a three-step process.
First, Social Security adjusts your earnings for historical changes in U.S. wages, takes your 35 best-paid years, and produces what it calls your average indexed monthly earnings (AIME). Only income up to the maximum taxable earnings — the annually adjusted cap on how much of your earnings are subject to Social Security taxes — is counted. (The maximum taxable earnings in 2019 are $132,900.)
Second, Social Security applies a formula to that monthly average to determine your primary insurance amount (PIA). That’s the amount you’ll get each month from Social Security if you wait until full retirement age (currently 66 and gradually rising to 67 for people born in 1960 or after) to claim benefits.
The formula breaks down your average monthly wage into three parts. In 2019, it is:
- 90 percent of the first $926 of your AIME;
- plus 32 percent of any amount over $926 up to $5,583;
- plus 15 percent of any amount over $5,583.
The sum of those three figures is your PIA, also known as your “full retirement benefit.” The sliding scale is designed to weight the benefit to help low-wage earners, who need retirement money the most.
Finally, Social Security plugs in the age at which you claim benefits. They take a bite from the full benefit if you are younger than full retirement age — you can lose more than a quarter of your benefits by starting Social Security at 62, the earliest possible age. But they add to your benefit for each month between full retirement age and 70 that you delay claiming benefits. You can gain as much as 32 percent extra in benefits this way.
Keep in mind
- Social Security recalculates your benefit annually, adjusting for inflation and figuring in the previous year’s income.
- If your previous year’s income ranks in your top 35 years of earnings, Social Security will shove aside a lower-earning year. That means your average monthly earnings figure will go up.
- If you worked fewer than 35 years, Social Security credits you with zero earnings for each year up to 35.