How are social security benefits calculated?

If you paid Social Security taxes during your working years, you may be eligible to receive at least one form of Social Security benefits. However, due to the many factors that Social Security considers to calculate benefits, it can be difficult to estimate the benefits you will receive in retirement.

When calculating Social Security benefits, the Social Security Administration (SSA) considers your highest 35 years of earnings and adjusts these earnings for inflation to calculate your average indexed monthly earnings (AIME). SSA then takes your AIME and uses it to determine your primary insurance amount (PIA), which is your full retirement benefit at the full retirement age.

What is the Social Security Benefits Formula?

You can use the Social Security formula to determine how much money you will receive in monthly payments. The Social Security formula breaks down your average indexed monthly earnings into the following three parts:

90% of the first 1024 of AIME

Add 32% of the amount over $1,024 up to $6,172

Add 15% of the amount above $6,172

The sum of the above formula is your primary insurance amount, also known as the full retirement benefit.

How Social Security Benefits are calculated

When calculating Social Security benefits, two important numbers you will need to calculate include the average indexed monthly earnings and the primary insurance amount.

Follow these steps when calculating Social Security benefits:

Calculate your AIME

When you retire, Social Security considers your highest 35 years of earnings and adjusts these earnings for inflation. If you worked for more than 35 years, Social Security drops the low-earning years and only considers the years with the highest earnings. However, if you worked for less than 35 years, you will have zeros in the years with zero earnings, which could lower your overall earnings. The resulting number is the average indexed monthly earnings (AIME).

Calculate PIA

Once you determine your AIME, you can use this number to calculate your personal insurance amount (PIA), which is the base rate for calculating Social Security payments.

PIA uses bend points, which are comparable to tax brackets, to determine how much of your income will be replaced by Social Security when you retire. Since Social Security is designed as a progressive social insurance, it replaces a bigger share of the AIME for low-workers than for high-income workers. The Social Security Administration updates the bend points each year.

For 2022, the bend point system is as follows:

90% of the first $1024 of AIME

Add 32% of AIME over $1024 and up to $6,172

Add 15% of AIME over $6,172.

For example, if your AIME is $1,500 in 2022, your personal insurance amount will be calculated as follows:

90% of $1024 = $921.6

32% of ($1,500 - $1024) = $152.32

15% of ($1,500 - $6,172) = $0

$921.6 + $152.32 = $1,073.92

The resulting sum is your PIA or full retirement benefit. However, this amount is not necessarily the final Social Security benefit that you will receive. It can change depending on several factors.   

Factors that can affect PIA

When using the Social Security formula to calculate benefits, the final number you get is your PIA, which is set at age 62. However, your PIA can increase or decrease due to the following factors:

Claiming benefits early

You can opt to claim Social Security benefits as early as 62. However, claiming benefits early reduces your benefits permanently, and you will receive reduced benefits than if you waited until the full retirement age.

Delaying Benefits Post-Full Retirement Age

When you delay claiming Social Security benefits past retirement age, your benefits are increased by 8% for each year you delay taking benefits. If your full retirement age is age 66, and you wait until age 70, your benefits will increase by as much as 32%.

Continuing To Work After Retirement

If you decide to continue working after retirement, your Social Security benefits may increase if you earn a higher income than you did in previous years. You should be aware, however, that after age 62, you won't be eligible for bend point inflation indexing.

Claim benefits early as you work

If you claim benefits before your full retirement age, and you continue working, Social Security may deduct your monthly benefits if your cumulative earnings exceed certain thresholds. The deduction will be applied until you reach your full retirement age when Social Security will recalculate your benefits to reflect the deduction. This could result in increased Social Security benefits.

What is the Maximum Social Security Benefit You Can Get?

The highest Social Security benefit you can receive varies based on your age when you claim benefits. Here is the highest payout you can receive at various ages:

$2,364 if you file at the age of 62.

$3,345 if you file at full retirement age

$4,194 if you file at age 70.

(As of May 2022, the average Social Security retirement benefit is $1,668 per month, while disability benefits average $1,362)

If your earnings equal or exceed Social Security's maximum taxable income, you are eligible for a maximum benefit. The maximum taxable income is the amount of earnings on which you pay Social Security taxes for at least 35 years of your career. In 2022, the maximum taxable income is $147,000, and it will increase to $160,200 in 2023. Annual adjustments are made based on changes in national wage levels.