How is My Social Security Payment Calculated?
You can reasonably count on Social Security benefits once you retire, but determining how much you’ll receive is a different story. There is a formula, of sorts. But as Mark Miller for Morningstar explains, it’s still complex.
Although you might not come to a precise dollar amount in predicting your benefits, it’s still interesting to learn how they are computed. It’s definitely not random, and the factors used by the Social Security Administration can change every year.
Here’s an overview of how it’s done:
Primary Insurance Amount at Full Retirement
Your Primary Insurance Amount (PIA), according to the Social Security Administration’s PIA page, is the dollar amount benefit that you should receive if you retire at the full retirement age – not early, and not delayed. Full retirement age is 65.
If you choose to retire early, you can do so and receive Social Security benefits as young as age 62. However, your potential full benefit amount will be reduced if you take it early, between 62 and 65. Conversely, you can decide to take delayed retirement at age 70. If you go that route, your benefits will be higher than they would at early or full retirement age, but delaying past 70 won’t result in a higher benefit.
Finding Your Average Indexed Monthly Earnings
Before your benefits are calculated, the Social Security Administration determines your Average Indexed Monthly Earnings or AIME. This is tricky. All of your earnings up to age 60 are indexed using the Average Wage Indexing Series, which compares them to earnings across the U.S.
For PIA purposes, your highest 35 years of earnings during that time period are averaged. If have fewer than 35 years worth of earnings when you reach 62, your highest years are used. Zeroes are then added to fill in for the years with no earnings, which can dramatically reduce your AIME.
Bend Points and Calculating PIA
The PIA formula for your benefits hinges on something called “bend points.” The name is just an explanation of how the dollar amounts that factor into your benefits look if they’re marked out on graph paper. When the dollar amounts are set as points on a graph, and a line is drawn to connect those points, it creates a bend. Thus, bend points.
According to the Social Security Administration, your PIA is derived from three different percentages of portions of your AIME, and they are your three bend points. Although they can vary, in 2015, the percentages and portions of AIME are 90 percent of the first $826 of your AIME, 32 percent of any amount between $826 and $4,980, and 15 percent of AIME that’s over $4,980.
Even with these calculations, benefits will vary. Bend points change, and there are programs that also affect benefits.
For example, there’s the Special Minimum Benefit Provision, which helps ensure that even low earners receive adequate benefits, and Auxiliary Benefits, which is a program for family members of some disabled persons.
Knowing how benefits are calculated can help you understand the process better. But there’s no simpler, faster, or more effective way to learn what your benefits will be than to register online with the Social Security Administration. By entering just a few details about yourself, you will see in seconds exactly what your benefits are projected to be as of today’s date.
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