Ask Rusty: How is my Social Security Benefit Amount Calculated?

Dear Rusty: A friend and I, both approaching 62 years old, were discussing Social Security the other day, and he said that they take the average of your highest 10 years of earnings to figure out your benefit amount. I told him I thought the formula is a lot more complicated than that, but he insisted he was right — saying his cousin has a friend who works for Social Security. Is my friend correct? Signed: Skeptical

Dear Skeptical: You are right to not take your friend’s opinion as correct, even when he claims to have a source who works for Social Security. The Social Security rules are quite complicated, and are easily misinterpreted, even by some folks working for the Social Security Administration (SSA). Most of the time, the mistaken opinion about the 10-year factor is due to a misunderstanding of what that factor is used for by the SSA, which is to determine your eligibility to collect benefits in the first place. A worker must have earned wages for a total of 40 quarters, or at least 10 years, in order to receive Social Security benefits on their own work record. There are other ways to be entitled to Social Security benefits (for example: spousal, survivor, and disability benefits), but to claim on your own work record you must have earned at least 40 quarter credits (10 years times 4 quarters per year = 40 quarter credits). And the good news is that you only have to earn a certain dollar amount to get credit for a quarter; you don’t have to work the entire calendar quarter.

So how does the SSA figure your benefit amount? To determine that amount it first uses the 35 highest earning years in your lifetime work record, but only earnings up to the amount you paid Social Security taxes on. It then adjusts (indexes) each of those year’s earnings for inflation, add them up and dividing the total by 420 (the number of months in 35 years) to arrive at something called your average indexed monthly earnings (or AIME). Note here that if you didn’t generate at least 35 years of earnings, the SSA will put zeros in for the years you didn’t earn, which means that your AIME will be smaller if you didn’t work at least 35 years. Your AIME isn’t the amount of your benefit either but it is used to calculate what Social Security calls your “Primary Insurance Amount” (or PIA) — the amount of benefit you will be entitled to at your “full retirement age” (or FRA). In true government fashion, the calculation of your PIA uses a formula that includes something called “bend points”, which are several points at which a different percentage of your AIME is used to figure the amount of benefit you would get if you took benefits at your full Social Security retirement age (age 66 for most people retiring today, but higher if you were born after 1954). And that’s where it stops — if you start taking you benefit at your full retirement age. But if you retire earlier, your benefit will be reduced. And if you retire later, your benefit will increase. How much of a reduction or increase? That’s a topic for another time.                                             

This viewpoint was written and submitted by the Association of Mature American Citizens (AMAC) Foundation Social Security advisory staff. It’s a charitable foundation that provides guidance and information on Social Security to Americans nearing retirement or already retired. Contact the foundation at info@amacfoundation or (888) 750-2622. 

Author note: The information presented in this article is intended for general information purposes only. The opinions and interpretations expressed in this article are the viewpoints of the AMAC Foundation’s Social Security advisory staff, trained and accredited under the National Social Security Advisors program of the National Social Security Association, LLC (NSSA). The NSSA, the AMAC Foundation, and the foundation’s Social Security Advisors are not affiliated with or endorsed by the United States Government, the Social Security Administration, or any other government entity.