How Social Security Benefit is Calculated – For Beginners and For Experts

There are some columns that I could repeat over and over – because I am asked the same questions over and over. One of the most common questions I am asked is this: “How is my Social Security benefit calculated?” I’ve answered this question many times in previous columns, and I’m going to do it again today.

This answer consists of two parts. The first part gives a relatively simple explanation of the process. It is for those people (probably the majority of my readers) who want a general idea of ​​how their benefit will be calculated. They just don’t need or want to know all the details. The second part of the answer is for those who want to know everything and become experts in the Social Security benefit calculation formula.
So let’s start simple. In a nutshell, Social Security retirement benefits are a percentage of your average monthly income based on your highest 35 years of inflation-adjusted earnings.

When you apply for retirement benefits, the Social Security Administration looks at your earnings history and takes out your highest 35 years. They don’t have to be consecutive. If you don’t have 35 years of earnings, the SSA must put in a “zero” annual salary for each year you haven’t worked until the 35-year base is reached.

However, before adding those “high 35” together, they index each year of past earnings for inflation. And this is where the formula gets a little messy. That’s because there is a different adjustment factor for each year of income, AND each year’s adjustment factor is different based on your year of birth.

Here’s a quick example. If you were born in 1955 and earned $32,400 in 1982, they would multiply that income by an inflation adjustment factor of 3.31, meaning that they would actually use $107,244 as your 1982 income. But if you were born in 1956 and in 1982 that same $32,400 earned they would use an inflation factor of 3.35, resulting in $108,540 as the 1982 income used in your Social Security calculation.

You can find a full list of those inflation adjustment factors for each birth year (for people approaching retirement age) on the Social Security Administration’s website:

The next step in the retirement calculation formula is adding up your highest 35 years of inflation-adjusted earnings. Then you divide by 420 — that’s the number of months in 35 years — to get your average inflation-adjusted monthly income.

The last step brings us to the “social” part of social security. The percentage of your average monthly income that you receive back in the form of social assistance benefits depends on your income. Simply put, the lower your average wage, the higher the rate of return you will get. Again, the actual formula is messy and varies depending on your year of birth. As an example, here’s the formula for someone born in 1955. You take the first $885 of your average monthly income and multiply it by 90%. You take the next $4,451 of your average monthly income and multiply that by 32%. And you take any remainder and multiply it by 15%.

You can find a full list of those “inflection points” for calculations at

Believe it or not, that was the simple explanation for those who just want a basic idea of ​​how your Social Security retirement benefit will be calculated. To summarize, it’s a percentage of your average monthly income based on your highest 35 years of inflation-adjusted earnings. If this were a college course, it could be called Social Security Benefit Computation 101.

But now I am going to offer the advanced course for those of you who want to become experts.

I’ll start by introducing this term: the “Primary Insurance Amount” or PIA. The PIA is your basic pension on which all future calculations are based. The “raw PIA” is actually calculated at age 62. In other words, when the SSA takes your highest earnings at age 35, they only use earnings up to age 62. Then that raw PIA is “cooked” or raised to account for any income you had after age 62 and to include any cost of living adjustments (COLAs) that were approved for Social Security benefits after the year you were 62. year.

But things get a little tricky when SSA recalculates the earnings you made after age 62. For example, if you worked full-time until you were 66, you would normally assume those earnings are between 62 and 66 your PIA. After all, you think, these are some of your highest earning years, so they’re going to be part of that “high 35.”

But not necessarily. And here’s why. For reasons I cannot explain in this short column, earnings after age 60 are not indexed for inflation. They are only calculated at the current dollar value. So if your “raw PIA” was based on a full 35-year history of high inflation-adjusted earnings, your current earnings may not be high enough to be part of your “high 35” so they don’t increase your benefit . Or maybe they increase the PIA, but not much.

In fact, I hear all the time from readers telling me they’re confused because the estimate of the benefit they’re getting from the SSA now (at age 66, say) isn’t much more than the estimate which they got back at the age of 62. Their current estimate of benefits includes the COLA increases, but little or no increase for their earnings after age 62. The reason is the lack of inflation indexation after age 60.

As you can see, the Social Security retirement benefit formula is pretty messy. And if you don’t want to be an expert, I say, “Don’t worry about it.” Just let the SSA do it for you. Go to and click on the “Pension Estimator” icon on the home page. It will walk you through the process of finding out what your Social Security benefit will be.


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