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4. How benefits are calculated

Full retirement age (“FRA”) was set at 65 in 1935, although it was 70 in some other countries. Recent legislation provided for increases in the FRA by increments, until it reaches 67 in the year 2025. Full retirement age for those born before 1938 is 65. For those born in 1938 it is 65 + 2 months; for those born in 1939 it is 65 + 4 months, and so on; going up in 2-month increments until the FRA reaches 66, at which point there will be a period of no increase. Unless there are further changes, increases will resume and continue until the FRA reaches age 67 in 2029.

Uncertainties about future funding of Social Security may require further changes in the initial age for full benefits. One possibility is to continue the incremental increases until full retirement age is 67, eliminating the gap in increases between 2011 and 2020. Some critics argue that workers performing hard physical labor would be unfairly impacted; others argue that in many other developed countries the retirement age has been 70 for many years.

As indicated above, it is possible to take a reduced benefit starting at age 62, or enlarge benefits by not claiming until some point after 65 (up to age 70). The formula for computing benefits is generally based on lifetime earnings. The formula is weighted so low-end workers receive much more than they contribute (adjusted for inflation), while higher-salaried workers who live an average life span will receive more than they paid in, but not in the same proportion as lower-paid workers.

Here are the steps used in calculating benefits:

1. Start with the lifetime earnings statement.

2. Multiply each year’s earnings by the index figures for that year (determined by Social Security). Indexing brings the value of earlier years’ wages into line with today’s wages.

3. Add the adjusted wages from the 35 highest-earnings years. Divide by 420 to get the Average Indexed Monthly Earnings (AIME).

THEN –

4. Multiply the AIME by the "bend points" for the year the worker became 62 ( the dollar amounts at which the bend points apply change from year to year):

Example:

AIME is $1,000 and worker became 62 in 2000. Bend points:

The PIA is the starting point for calculating benefits. If this beneficiary began collecting benefits at age 62 her monthly benefit would be the PIA less the reduction for early retirement. If she retired at age 65 (with no additional earnings) her benefit would be $628 plus cost-of-living adjustments for each of the years since her PIA was determined.

Fortunately, the SSA web site now has computerized calculations that provide these figures without the intervening steps. It is useful, however, to understand how the process works.

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