How Are Social Security Benefits Calculated?

How Are Social Security Benefits Calculated and What Can I Do To Increase Benefits?”

There are a minimum number of years to qualify. To qualify for any Social Security benefits, you must have at least 40 credits. To receive a credit in 2017, you need to earn $1,300 per credit (this number adjusts each year), with a maximum of four credits per year. So to receive the 40 credits you have to work for at least 10 years earning enough income to qualify for the four credits each year.

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How much you receive depends on how long you worked and how much you earned before retirement. 

When Social Security calculates your benefits they first look at your annual earnings over your entire lifetime and then index the amounts for inflation to calculate the values in todays dollars. Next, the 35 highest years’ earnings are added up and divided by 35 to come up the average. This is known as the AIME (Average Index Monthly Earnings). If you don’t have 35 years of earnings, the missing years will be filled in with zeroes.

Next they determine your Primary Insurance Amount (PIA) that will be payable at your Full Retirement Age (FRA). It’s a bit complicated, but just so you know, here’s how it’s calculated. After determining your average earnings over 35 years, then 90% of the first $885 is allowed, then 32% of the amount between $885 and $5336, and finally 15% of the amount above $5336. The three values are added up to determine your PIA.

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Many people may wonder what is the maximum amount that they can receive?

Assuming they had maximum earnings for all 35 years, in 2017, a 62 year old would receive $2,153, a 66 year old would receive $2,687, and a 70 year old would receive $3,538.

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What about a minimum benefit?

If a worker has had low wages throughout their lifetime, and has worked 35 years the least one can receive is $832.20 which is 20% below the federal poverty level. This is known as the Special Minimum Primary Insurance Amount. For workers with fewer years of work history the amount decreases.

What is My Full Retirement Age?

It has to do with your year of birth. Social Security has determined an exact age down to the month. Here is the breakdown:

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Year of Birth Full Retirement Age

1943-54                                         66
1955                                               66 and 2 months
1956                                               66 and 4 months
1957                                               66 and 6 months
1958                                              66 and 8 months
1959                                              66 and 10 months
1960 and after                              67

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It’s Important to Have 35 Years of Earnings. If you have less then 35 years of earnings then zeros are added into the formula. When averaging over 35 years this of course will have the affect of reducing your Social Security income. So the bottom line if you still have the opportunity to work more years to offset the zero years, then by all means do so, as this can have a significant affect on your payments that you receive.

Don’t Forget Spousal Benefits. Keep in mind that at the least, a husband or wife is entitled to 50% of their spouse’s Social Security, so if you don’t have a enough work history and even if you decided to work to offset the zeros, it may not matter if it is still less then 50% of your spouse’s. This was originally enacted to offset the fact that many spouses stayed home to raise children.

What if you are divorced or a widow? Read What About Spousal Benefits for Social Security for a more detailed explanation as there are many important facts to consider

A Raise In Pay. Each year, annual COLAs are calculated and applied to your benefit to help you keep up with the cost of living. Although recently the increases have been small, over time you should see incremental increases to help adjust for inflation.

So this Article should help to give you a better picture of how your Social Security benefits are calculated.

IF you have any questions on the details of your Social Security drop us a note and we will try to help!