How Social Security Benefits Are Computed:
In Brief

Noah P. Meyerson
Analyst in Income Security
May 12, 2014
Congressional Research Service
7-5700
www.crs.gov
R43542


How Social Security Benefits Are Computed: In Brief

Summary
With $812 billion in benefit outlays in 2013, Social Security is the largest program in the federal
budget. It provides monthly cash benefits to retired and disabled workers and their family
members as well as to the family members of deceased workers. Currently, there are about 58
million beneficiaries. Under current law, Social Security’s revenues are projected to be
insufficient to pay full scheduled benefits after 2033.
Monthly benefit amounts are determined by federal law. Social Security is an issue of ongoing
interest both because of its role in supporting a large portion of the population and because of its
long-term financial imbalance, and policy makers have considered numerous proposals to change
its benefit computation rules.
The Social Security benefits that are paid to worker beneficiaries and to workers’ dependents and
survivors are based on workers’ past earnings. The computation process involves three main
steps:
• First, a summarized measure of lifetime earnings is computed. That measure is
called the average indexed monthly earnings (AIME).
• Second, a benefit formula is applied to the AIME to compute the primary
insurance amount (PIA). The benefit formula is progressive. As a result, workers
with higher AIMEs receive higher Social Security benefits, but the benefits
received by people with lower earnings replace a larger share of past earnings.
• Third, an adjustment may be made based on the age at which a beneficiary
chooses to begin receiving payments. For retired workers who claim benefits at
the full retirement age (FRA), which is currently 66, and for disabled workers,
the monthly benefit equals the PIA. Retired workers who claim earlier receive
lower monthly benefits, and those who claim later receive higher benefits.
Benefits for eligible dependents and survivors are based on the worker’s PIA. For example, a
dependent spouse receives a benefit equal to 50% of the worker’s PIA, and a widow(er) receives
a benefit equal to 100% of the worker’s PIA. Dependent benefits may also be adjusted based on
the age at which they are claimed.


Congressional Research Service

How Social Security Benefits Are Computed: In Brief

Contents
Introduction ...................................................................................................................................... 1
Eligibility ......................................................................................................................................... 1
Average Indexed Monthly Earnings ................................................................................................ 2
Wage Indexing ........................................................................................................................... 2
Averaging Indexed Earnings ..................................................................................................... 2
Primary Insurance Amount .............................................................................................................. 3
Wage Indexing Results in Stable Replacement Rates ...................................................................... 4
Cost-of-Living Adjustment .............................................................................................................. 4
How Timing of Benefit Claim Affects Benefit Levels .................................................................... 5
Full Retirement Age .................................................................................................................. 5
Adjustments for Early and Late Benefit Claim ......................................................................... 5
Dependent Benefits .......................................................................................................................... 7
Other Adjustments to Benefits ......................................................................................................... 7

Figures
Figure 1. Computation of a Worker’s Primary Insurance Amount (PIA) in 2014 ........................... 4
Figure 2. Monthly Retirement Benefit by Claim Age ...................................................................... 6

Tables
Table 1. Computation of a Worker’s Primary Insurance Amount (PIA) in 2014
Based on an Illustrative AIME of $5,000 ..................................................................................... 3
Table 2. Full Retirement Age (FRA) by Year of Birth ..................................................................... 5

Contacts
Author Contact Information............................................................................................................. 8

Congressional Research Service

How Social Security Benefits Are Computed: In Brief

Introduction
Social Security, which paid $812 billion in benefits in 2013, is the largest program in the federal
budget. There are currently about 58 million Social Security beneficiaries.1
Most Social Security beneficiaries are retired and disabled workers, whose monthly benefits
depend on their past earnings, their age, and other factors. Benefits are also paid to workers’
dependents and survivors. Dependent and survivors benefits are based on the earnings of the
workers upon whose work record they claim.
Social Security has an important impact on beneficiaries, both young and old, in terms of income
support and poverty reduction. However, under current law, Social Security’s revenues are
projected to be insufficient to pay full scheduled benefits after 2033. For both of those reasons, is
an issue of ongoing interest to policy makers. Most proposals to change Social Security outlays
would change the benefit computation rules. Evaluating such proposals requires an understanding
of how benefits are computed under current law.
Eligibility
A person who has sufficient history of earnings in employment subject to Social Security payroll
taxes becomes “insured” for Social Security, which makes the worker and qualified dependents
eligible for benefits. Insured status is based on the number of “quarters of coverage” (QCs)
earned.2 In 2014, a worker earns one QC for each $1,200 of earnings, and a worker may earn up
to four QCs per calendar year. The amount needed for a QC increases annually by the growth in
average earnings in the economy, as measured by Social Security’s average wage index.3
To be eligible for most benefits, workers must be “fully insured,” which requires one QC for each
year elapsed after the worker turns 21 years old, with a minimum of 6 QCs and a maximum of 40
QCs. A worker is first eligible for Social Security retirement benefits at 62, so to be eligible for
retirement benefits, a worker must generally have worked for 10 years.
Benefits may be paid to eligible survivors of workers who were fully insured at the time of death.
Some dependents are also eligible if the deceased worker was “currently insured,” which requires
earning 6 QCs in the 13 quarters ending with the quarter of death.
To be eligible for disability benefits, workers must also satisfy a recency of work requirement.
Workers aged 31 and older must have earned 20 QCs in the 10 years before becoming disabled.
Fewer QCs are required for younger workers.4

1 This report provides an overview of how Social Security benefits are computed. For additional details and a more
comprehensive overview of Social Security, see CRS Report R42035, Social Security Primer, by Dawn Nuschler.
2 For details, see “Insured Status” in Social Security Administration, Annual Statistical Supplement, 2013 (February
2014), at http://www.ssa.gov/policy/docs/statcomps/supplement/2013/oasdi.html.
3 The average wage index is the average of all workers’ wages subject to federal income taxes and contributions to
deferred compensation plans. It is calculated using some wages that are not subject to the Social Security payroll tax.
4 To be eligible for disability benefits, workers must also be found unable to engage in substantial gainful activity. See
CRS Report RL32279, Primer on Disability Benefits: Social Security Disability Insurance (SSDI) and Supplemental
(continued...)
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How Social Security Benefits Are Computed: In Brief

Average Indexed Monthly Earnings
The first step of computing a benefit is determining a worker’s average indexed monthly earnings
(AIME), a measure of a worker’s past earnings.
Wage Indexing
Rather than using the amounts earned in past years directly, the AIME computation process first
updates past earnings to account for growth in overall economy-wide earnings. That is done by
increasing each year of a worker’s taxable earnings after 1950 by the growth in average earnings
in the economy, as measured by Social Security’s average wage index, from the year of work
until two years before eligibility for benefits, which for retired workers is at 62. For example, the
Social Security average wage grew from $32,155 in 2000 to $41,674 in 2010. So if a worker
earned $20,000 in 2000 and turned 60 in 2010, the indexed wage for 2000 would be $20,000 x
($41,674 / $32,155), or $25,921. Earnings from later years—for retired workers, at ages 61 and
above—are not indexed.
Averaging Indexed Earnings
For retired workers, the AIME equals the average of the 35 highest years of indexed earnings,
divided by 12 (to change from an annual to a monthly measure). Those years of earnings are
known as computation years. If the person worked fewer than 35 years in employment subject to
Social Security payroll taxes, the computation includes some years of zero earnings. For example,
benefits for workers who immigrated to the United States may be based only on their earnings in
the United States and could include zero earnings for years before they immigrated, even if they
had earnings in another country.5
In the case of workers who die before turning 62 years old, the number of computation years is
generally reduced below 35 by the number of years until he or she would have reached 62. For
example, the AIME for a worker who died at 61 is based on 34 computation years.
For disabled workers, the number of computation years depends primarily on the age at which
they become disabled, increasing from two years for those aged 24 or younger to 35 years for
those aged 62 or older.6

(...continued)
Security Income (SSI), by William R. Morton.
5 International “totalization agreements” allow workers who divide their careers between the United States and certain
countries to fill gaps in Social Security coverage by combining work credits under each country’s system to qualify for
benefits under one or both systems. See CRS Report RL32004, Social Security Benefits for Noncitizens, by Dawn
Nuschler and Alison Siskin.
6 The number of computation years equals the number of “elapsed years” minus any “dropout years.” The number of
elapsed years equals the calendar years after an individual turns 21 years old through the year before the individual first
becomes eligible for disability benefits, with a minimum of two. For every five elapsed years, there is one disability
dropout year, up to a maximum of five. In addition, people with fewer than three disability dropout years may be
credited with up to two additional dropout years based on the care of a child, for up to a total of three dropout years.
See CRS Report R43370, Social Security Disability Insurance (SSDI): Becoming Insured, Calculating Benefit
Payments, and the Effect of Dropout Year Provisions
, by Umar Moulta-Ali.
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How Social Security Benefits Are Computed: In Brief

Primary Insurance Amount
The next step in determining a benefit is to compute the primary insurance amount (PIA) by
applying a benefit formula to the AIME.
First, the AIME is sectioned into three brackets (or segments) of earnings, which are divided by
dollar amounts known as bend points. In 2014, the bend points are $816 and $4,917. Those
amounts are indexed to the average wage index, so they generally increase each year.
Three factors, which are fixed by law at 90%, 32%, and 15%, are applied to the three brackets of
AIME. For workers with AIMEs of $816 or less in 2014, the PIA is 90% of the AIME. Because
the other two factors are lower, that share declines as AIMEs increase, which makes the benefit
formula progressive. For workers who become eligible for retirement benefits, become disabled,
or die in 2014, the PIA is determined as shown in the example in Table 1 and in Figure 1.
Table 1. Computation of a Worker’s Primary Insurance Amount (PIA) in 2014
Based on an Illustrative AIME of $5,000
PIA for Worker with an
Factors
Three Brackets of AIME
Illustrative AIME of $5,000
90%
first $816 of AIME, plus
$734.40
32%
AIME over $816 and through $4,917, plus
$1,312.32
15%
AIME over $4,917
$12.45
Total: Worker’s PIA (by law, rounded down to nearest 10 cents)
$2,059.10
Source: Congressional Research Service.
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How Social Security Benefits Are Computed: In Brief

Figure 1. Computation of a Worker’s Primary Insurance Amount (PIA) in 2014
Primary Insurance Amount
$3,000
$2,500
Second Bend
Point ($4,917)
15% bracket
$2,000
$1,500
32% bracket
First Bend
Point ($816)
$1,000
$500
90% bracket
$0
$0
$2,000
$4,000
$6,000
$8,000
$10,000
Average Indexed Monthly Earnings

Source: Congressional Research Service.
Wage Indexing Results in Stable Replacement Rates
In the AIME computation, earnings are indexed to the average wage index, and the bend points in
the benefit formula are indexed to growth in the average wage index. As a result, replacement
rates—the portion of earnings that benefits replace—remain generally stable. That is, from year
to year, the average benefits that new beneficiaries receive increase at approximately the same
rate as average earnings in the economy.
Cost-of-Living Adjustment
A cost-of-living adjustment (COLA) is applied to the benefit beginning in the second year of
eligibility, which for retired workers is age 63. The COLA applies even if a worker has not yet
begun to receive benefits. The COLA usually equals the growth in the Consumer Price Index for
Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of one calendar year to
the third quarter of the next year. For example, beneficiaries received a COLA of 1.5% in January
2014 because the CPI-W increased by 1.5% between the third quarter of 2012 and the third
quarter of 2013.7

7 If the CPI-W does not increase over the relevant period, no COLA is payable. No COLA was payable in January 2010
or January 2011 because the CPI-W for the third quarter of 2009 and for the third quarter of 2010 were both lower than
the CPI-W for the third quarter of 2008. For details, see CRS Report 94-803, Social Security: Cost-of-Living
Adjustments
, by Gary Sidor.
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How Social Security Benefits Are Computed: In Brief

How Timing of Benefit Claim Affects Benefit Levels
Full Retirement Age
The full retirement age (FRA, also called the normal retirement age) is the age at which a worker
can receive the full PIA, increased by any COLAs. The FRA was 65 for people born before 1938,
but the Social Security Amendments of 1983 (P.L. 98-21) raised the FRA for those born later, as
shown in Table 2.
Table 2. Full Retirement Age (FRA) by Year of Birth
Year of Birth
Year Turning 62
Full Retirement Age
1937 or earlier
1999 or earlier
65
1938
2000
65 and 2 months
1939
2001
65 and 4 months
1940
2002
65 and 6 months
1941
2003
65 and 8 months
1942
2004
65 and 10 months
1943-1954 2005-2016
66
1955
2017
66 and 2 months
1956
2018
66 and 4 months
1957
2019
66 and 6 months
1958
2020
66 and 8 months
1959
2021
66 and 10 months
1960 or later
2022 or later
67
Source: Social Security Administration, Office of the Chief Actuary, “Normal Retirement Age,” at
http://www.ssa.gov/OACT/progdata/nra.html.
Adjustments for Early and Late Benefit Claim
Retired workers may claim benefits when they turn 62 years old, but the longer that they wait, the
higher their monthly benefit. The higher monthly benefit is intended to offset the fewer number of
payments that people who delay claim will receive over their lifetimes, so that the total value of
lifetime benefits is approximately the same regardless of when they claim.
The permanent reduction in monthly benefits that applies to people who claim before the FRA is
called an actuarial reduction. It equals 6⅔% per year for the first three years of early claim and
5% for additional years.8

8 Technically, the actuarial reduction is five-ninths of 1% for each month up to 36 months of benefit entitlement before
the FRA and five-twelfths of 1% for each month beyond 36 months.
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How Social Security Benefits Are Computed: In Brief

The permanent increase in monthly benefits that applies to those who claim after the FRA is
called the delayed retirement credit. For people born in 1943 and later, that credit is 8% for each
year of delayed claim after the FRA, up to age 70.9
For people with an FRA of 66, therefore, monthly benefits are 75% of the PIA for those who
claim benefits at the age of 62 and 132% of the PIA for people who wait until the age of 70 to
claim (see Figure 2). Because people who claim earlier receive more payments over a lifetime,
the overall effect of claiming at different ages depends on how long the beneficiary lives. For
example, someone who dies at 71 years old would be better off claiming early, but someone who
survives to 95 would be better off claiming late.
Figure 2. Monthly Retirement Benefit by Claim Age
Percentage of Primary Insurance Amount (PIA), for People with a Ful Retirement Age of 66
(percent)
Delayed Retirement Credit
140%
132.0%
124.0%
120%
116.0%
108.0%
Actuarial Reduction
100.0%
100%
93.3%
86.7%
80.0%
80%
75.0%
60%
40%
20%
0%
62
63
64
65
66
67
68
69
70
Age

Source: Congressional Research Service.
An increase in the FRA results in lower benefits regardless of when they are claimed. Depending
on the claim age, the scheduled increase in the FRA from 66 to 67 will reduce monthly benefits
by between 6.1% and 7.7%. For example, people who have an FRA of 66 and who claim at aged
62 receive a benefit equal to 75% of the PIA. But when the FRA increases to 67, claiming at 62
will result in a benefit of 70% of the PIA.

9 For people born before 1943, the delayed retirement credit varies from 3.0% to 7.5%, depending on the year of birth.
See “Delayed Retirement Credit” in Social Security Administration, Office of the Chief Actuary, “Early or Late
Retirement?,” at http://www.ssa.gov/OACT/quickcalc/early_late.html#late.
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How Social Security Benefits Are Computed: In Brief

Dependent Benefits
Social Security benefits are payable to the spouse, divorced spouse, or child of a retired or
disabled worker and to the widow(er), divorced widow(er), child, or parent of a deceased
worker.10 When dependent beneficiaries also earned worker benefits, they receive the larger of the
worker or the dependent benefit.
A spouse’s base benefit (that is, before any adjustments) equals 50% of the worker’s PIA. A
widow(er)’s base benefit is 100% of the worker’s PIA. The base benefit for children of a retired
or disabled worker is 50% of the worker’s PIA, and the base benefit for children of deceased
workers is 75% of the worker’s PIA.
Other Adjustments to Benefits
Other benefit adjustments apply in certain situations, notably
• the windfall elimination provision (WEP), which reduces benefits for worker
beneficiaries who have pensions from employment that was not subject to Social
Security payroll taxes;11
• the government pension offset (GPO), which reduces Social Security spousal
benefits paid to people who have pensions from employment that was not subject
to Social Security payroll taxes;12
• the retirement earnings test, which delays monthly Social Security benefits paid
to beneficiaries who are younger than the full retirement age and have earnings
above a certain level;13 and
• the maximum family benefit, which limits the amount of benefits payable to a
family.14
In some cases, a portion of Social Security benefits may be subject to income tax. Taxation is not
a benefit adjustment, but it does affect the net income of beneficiaries. For additional information,
see CRS Report RL32552, Social Security: Calculation and History of Taxing Benefits, by Noah
P. Meyerson.


10 The computation of dependent benefits may be quite complex. For additional details and information on other
dependent benefits, see “Benefits for the Worker’s Family Members” in CRS Report R42035, Social Security Primer,
by Dawn Nuschler.
11 See CRS Report 98-35, Social Security: The Windfall Elimination Provision (WEP), by Gary Sidor.
12 See CRS Report RL32453, Social Security: The Government Pension Offset (GPO), by Gary Sidor.
13 See CRS Report R41242, Social Security Retirement Earnings Test: How Earnings Affect Benefits, by Dawn
Nuschler.
14 See “Maximum Family Benefit Amount” in CRS Report R42035, Social Security Primer, by Dawn Nuschler.
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How Social Security Benefits Are Computed: In Brief

Author Contact Information

Noah P. Meyerson

Analyst in Income Security
nmeyerson@crs.loc.gov, 7-4681


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