A University of Alabama Law School Clinical Program funded in part by West Alabama Regional Commission

4. How benefits are calculated

Full retirement age (“FRA”) was set at 65 in 1935, although it was 70 in some other countries. Legislation provided for increases in the FRA by increments. For those born in 1943 - 1954, full retirement age is 66. In 2020 there will be two-month annual until FRA reaches 67 in 2027.

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.

It is possible to take a reduced benefit starting at age 62, or enlarge benefits by claiming after FRA (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. Ex. Worker born in 1947 who earned $7,627 in 1974 would multiply that by an index factor of 5.0313, for adjusted wages of $38,256 for that year.

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):
Work through this complex process yourself by going to www.ssa.gov/begin-est/

The Primary Insurance Amount (PIA) is the starting point for calculating benefits. If a beneficiary begins collecting benefits at age 62 her monthly benefit will be the PIA less the reduction for early retirement. If she retires at age 66 (with no additional earnings) her benefit would be the PIA 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 individual having to make these complex steps. It is useful, however, to understand how the process works.

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