The amount you receive from Social Security is not based on how many credits you earn, but rather on your lifetime earnings, particularly your 35 highest-earning years. The calculation is based on your Average Indexed Monthly Earnings (AIME) and Primary Insurance Amount (PIA), with final adjustments for your claiming age.
The Three-Step Process for Determining Your Benefits
Step 1: Calculating Your Average Indexed Monthly Earnings (AIME)
The first step is for the SSA to review your lifetime earnings history and calculate your AIME. This process involves adjusting your earnings from prior years for historical wage growth to make them comparable to current wage levels.
- Wage indexing: The SSA indexes your earnings for every year up to the year you turn 60 to reflect national average wage growth. This helps to ensure your benefits reflect the overall increase in the standard of living during your working years.
- Identify highest 35 years: The SSA selects your 35 highest-earning years based on these indexed wages. If you have fewer than 35 years of covered earnings, a zero will be entered for each missing year, which will lower your overall average.
- Compute average monthly earnings: The sum of your highest 35 years of indexed earnings is divided by 420 (the number of months in 35 years). The result, rounded down, is your AIME.
Step 2: Applying the Formula to Find Your Primary Insurance Amount (PIA)
Once your AIME is established, the SSA uses a progressive formula to determine your Primary Insurance Amount (PIA). The PIA is the amount you are entitled to receive each month if you claim benefits at your full retirement age (FRA). The formula uses dollar amounts called "bend points" which change each year to reflect national wage levels.
For workers who become eligible in 2025, the PIA formula is as follows:
- 90% of the first $1,226 of your AIME
- 32% of your AIME between $1,226 and $7,391
- 15% of your AIME over $7,391
The sum of these three percentages is your PIA, which provides higher-income earners with a greater benefit but replaces a proportionally larger share of income for lower-income earners.
Step 3: Adjusting Your Benefits Based on When You Claim
The age you decide to start receiving benefits is one of the most critical factors impacting your monthly payment. Your final benefit amount will be increased or decreased from your PIA based on whether you claim before or after your FRA.
Comparing Benefits Based on Claiming Age
| Feature | Claiming at Age 62 (Early Retirement) | Claiming at Full Retirement Age (FRA) | Claiming at Age 70 (Delayed Retirement) |
|---|---|---|---|
| Monthly Benefit | Permanently reduced from PIA. | 100% of your PIA. | Permanently increased by Delayed Retirement Credits (DRCs). |
| Reduction/Increase Amount (born 1960 or later, FRA 67) | Up to 30% reduction. | N/A | Up to 24% increase (8% per year). |
| Credits for Delaying | No additional credits. | No additional credits. | Earns DRCs each month after FRA, up to age 70. |
| Lifespan Impact | Smaller checks over more years. | Base benefit over standard period. | Larger checks over fewer years. |
The Role of Annual Cost-of-Living Adjustments (COLAs)
After you begin receiving benefits, your payment is adjusted annually to keep up with inflation. The Cost-of-Living Adjustment (COLA) is tied to the Consumer Price Index and helps protect the purchasing power of your benefits over time. These adjustments are applied to your PIA starting in the year you become eligible for benefits (at age 62), even if you do not claim until a later age.
Conclusion: Your Choices Matter
The Social Security Administration's formula for determining your benefits is a multi-step process rooted in your lifetime earnings history and the age at which you begin claiming. Factors like working consistently for at least 35 years and delaying your claim can significantly increase your monthly payment. Ultimately, understanding how your earnings and timing affect this calculation is crucial for maximizing your retirement security.
This content is for informational purposes only. For personalized advice, consider consulting a financial professional or contacting the Social Security Administration directly. Social Security Website
Other factors affecting Social Security payments
How does continued work after retirement affect my benefits?
If you continue to work after you begin collecting Social Security, and your new earnings are higher than one of your previous 35 highest-earning years, the SSA will automatically recalculate your benefit and may increase your monthly payment. However, if you claim benefits before your FRA and earn over a certain annual limit, your benefits may be temporarily reduced.
How are benefits for family members calculated?
In addition to retirement benefits, Social Security also pays benefits to spouses, former spouses, and dependent children. The total amount paid to a family on one person's record is subject to a family maximum benefit, which is generally between 150% and 180% of the worker's PIA.
What about Cost-of-Living Adjustments?
Once you start receiving benefits, your monthly payment will be subject to a Cost-of-Living Adjustment (COLA) each year to ensure that your benefit keeps up with inflation. This adjustment is applied to the benefit you receive, not your PIA.
