How Does Social Security Work, Anyway?

12/23/2014
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Social Security: How Benefits are Calculated

 

The way the U.S. Social Security Administration calculates a person’s benefits in retirement may seem a bit of a mystery. Without a doubt, it’s a complicated formula. But there are basic guidelines that are fairly straightforward, and there’s a way for you to check your benefit amount online.

The specifics of how your future benefits are affected by your earnings is all about how Social Security calculates your earnings base. Social Security keeps track of all your covered earnings (earnings on which you paid Social Security payroll taxes) during your working life. Each year, it applies an index factor to your earnings to adjust them for the wage inflation that has occurred since that year.

In this way, money earned during 1985, for example, carries the same weight in calculating your Social Security benefits as money earned in 2005 or 2010 or 2014. This indexing stops when you turn 60; any earnings after that age are included in your earnings record on an unadjusted basis. Because of wage inflation, it’s quite likely these later-age earnings will raise your benefits.

The agency uses your highest 35 years of earnings to determine what it calls your Primary Insurance Amount (PIA), the benefit you’d get if you began collecting benefits at your normal retirement age, which is your full retirement age. They add together the highest indexed earnings for 35 years, then divide by the number of years (35), and round down the result to the next lower dollar amount.

If you do not have 35 years of eligible covered earnings, the agency enters a zero for each “missing” year. So, for example, if you had only 20 years of covered earnings, Social Security would calculate your benefit by using the earnings for those 20 years, adding 15 zeroes, and using this average to determine your PIA. (The PIA is also used in determining benefits to your spouse or former spouse that are based on your earnings record.)

Rather than trying to figure your benefit amount on your own through calculations, you can see your earnings record at the Social Security website. 

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