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February 1, 2021
Social Security: Benefit Calculation Overview
Background
covered employment are included in the calculation.
Old-Age and Survivors Insurance (OASI) and Disability
Earnings that were not covered (i.e., not subject to the
Insurance (DI), referred to on a combined basis as OASDI,
Social Security payroll tax) are not included.
are social insurance programs that protect workers and their
family members against a loss of income due to old age,
Under current law, the Social Security payroll tax is applied
disability, or death. These programs are often referred to as
to covered earnings up to an annual limit, or taxable
Social Security. Most Social Security beneficiaries are
maximum ($142,800 in 2021). This level of earnings is
retired or disabled workers whose monthly benefits depend
both the contribution base (i.e., amount of covered earnings
on their past earnings, their age, and other factors. Benefits
subject to the Social Security payroll tax) and the benefit
are also paid to workers’ eligible dependents and survivors
base (i.e., amount of covered earnings used to determine
based on the worker’s earning record.
benefits). Earnings in excess of the taxable maximum are
not included benefit calculations. The taxable maximum is
This In Focus provides an overview of the computation of
indexed to national average wage growth for years in which
Social Security benefits. The examples used throughout are
a cost-of-living adjustment (COLA) is payable.
for those of a hypothetical medium earner—a worker who
consistently earned at a medium level—born in 1951 (the
Rather than using the amounts earned in past years directly,
most recent year for which complete information on
the AIME computation process first updates past earnings
indexed earnings and program specific factors are known).
up to the taxable maximum to account for the growth in
From 2014 through 2019, roughly 30% of workers retiring
overall economy-wide earnings. That is done by increasing
had career-average earnings at about the medium level (see
each year of a worker’s taxable earnings after 1950 by
“Related Resources”).
growth in average earnings in the economy, as measured by
the AWI, from the year of work until two years prior to
Eligibility and Insured Status
eligibility for benefits, which for retired workers is at age
About 93% of workers earn wages or income in Social
60. For instance, the national average wage grew from
Security–covered employment. While working in covered
$32,155 in 2000 to $41,674 in 2010. So if a worker earned
employment, workers earn quarters of coverage (QCs). In
$20,000 in 2000 and turned 60 in 2010, the indexed wage
2021, a worker earns one QC for every $1,470 of earnings,
for 2000 would be $20,000 × ($41,674/$32,155), or
up to four QCs per year. A worker who earns at least
$25,921. Earnings from later years —for retired workers at
$5,880 in covered employment at any point in 2021 is
ages 60 and above—are not indexed.
credited with the maximum number (four) of QCs for that
year. The level of earnings needed for a QC generally
Number of Years
increases annually with growth in average earnings in the
For retired workers, the AIME equals the average of the
national economy, as measured by Social Security’s
highest 35 years of indexed earnings divided by 12 (to
Average Wage Index (AWI).
change the benefit from an annual to a monthly measure).
Those years of earnings are known as computation years. If
To be eligible for benefits, workers must be fully insured.
the person worked fewer than 35 years in employment
Fully insured status requires one QC for each year elapsed
subject to Social Security payroll taxes, the computation
after the worker turns 21 years old—with a minimum of six
includes those as years of zero earnings. The number of
QCs and a maximum of 40 QCs —through the year before
computation years for disabled or deceased workers may be
the worker attains age 62, the year before the worker dies,
fewer than 35 years.
or the year before the worker becomes disabled. A worker
is first eligible for Social Security retirement benefits at age
The sum of the highest 35 years of wage-indexed earnings
62, so to be eligible for retirement benefits, a worker must
for a hypothetical medium earner born in 1951 is
generally have worked for 10 years.
$1,500,603.99. (Wage-indexed earnings are rounded to the
nearest cent.) This sum figure is then divided by 420 (the
Average Indexed Monthly Earnings
number of months in 35 years) to determine the worker’s
The first step in determining Social Security benefits
AIME, or $3,572.00. (AIMEs are rounded down to the
amounts for eligible workers is to compute the average
nearest dollar.)
indexed monthly earnings (AIME), a measure of a worker’s
past earnings.
Primary Insurance Amounts
The next step in determining the Social Security benefit
Wage Indexing
amount is to compute the primary insurance amount (PIA).
A worker’s benefit amount is based on his or her earnings
To do this, the AIME is sectioned into three brackets (or
during covered employment. Only earnings from years of
segments) of earnings, which are divided by dollar amounts
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known as bend points. In 2021, the bend points are $996
benefits. The COLA usually equals the growth in the
and $6,002. Those amounts are indexed to the AWI, so they
Consumer Price Index for Urban Wage Earners and Clerical
generally increase each year.
Workers from the third quarter of one calendar year to the
third quarter of the next calendar year. The COLA becomes
Three factors—fixed in law at 90%, 32%, and 15%—are
effective in December of the current year and is payable in
applied to the three brackets of AIME to allow for a
January of the following year. Beneficiaries received a
progressive benefit formula. The formula results in a
COLA of 1.3% for benefits paid in January 2021.
progressive replacement rate, which is measured as the
percent of AIME that the PIA replaces. The replacement
Adjustments to the PIA for early or late claiming (relative
rate is higher for lower earners —83% for very low
to a worker’s FRA) interact with COLAs to produce the
earners—than for higher earners—37% for high earners
actual benefit amount. These two factors affect all
(see “Related Resources”). The formula also results in
claimants, while other adjustments may affect only some
individual equity: The more a worker earns (and pays in
claimants (see “Other Adjustments”). Table 2 shows how
payroll tax), up to the taxable maximum, the higher the
adjustments for claiming age work together with COLAs to
PIA. Table 1 shows how to calculate the PIA for a
produce benefit amounts before other adjustments.
hypothetical medium earner born in 1951.
Table 2. Monthly Benefit Amounts for Hypothetical
Table 1. Computation of Primary Insurance Amount
Medium Earner Born in 1951, by Claiming Age
(PIA) for Hypothetical Medium Earner Born in 1951
Primary Insurance Amount (PIA) adjusted for claiming age
relative to full retirement age (FRA) and cost-of-living
Brackets of
Medium Earner
adjustments (COLAs)
Factors
AIME in 2013
(AIME of $3,572.00)
Benefit Amount
90%
first $791 of AIME,
Percent
$711.90
Year
Age
COLA
plus
of PIA
(PIA of $1,601.80)
32%
AIME over $791 and
2013
62
75%
-
$1,201.00
889.92
through $4,768, plus
2014
63
80%
1.5%
1,300.00
15%
AIME over $4,768
0.00
2015
64
86.66%
1.7%
1,432.00
Total: Worker’s PIA (by law,
1,601.80
2016
65
93.33%
0.0%
1,543.00
rounded down to nearest 10 cents)
Source: CRS.
2017
66
100%
0.3%
1,658.00
Notes: The bend points shown in the table apply to workers who
2018
67
108%
2.0%
1,826.00
first become eligible in 2013 (i.e., the year in which a hypothetical
2019
68
116%
2.8%
2,017.00
medium earner born in 1951 reaches age 62). Under current law, PIA
is rounded down to the nearest dime (42 U.S.C. §415(a)(1)(A)).
2020
69
124%
1.6%
2,190.00
Benefit Amounts
2021
70
132%
1.3%
2,362.00
Source: CRS.
The PIA is further adjusted for age at benefit claiming and
for COLAs to determine the benefit received by the worker.
Notes: Under current law, monthly benefit amounts are rounded
down to the nearest dol ar (42 U.S.C. §415(g)).
Adjustments for Claiming Age
The earliest eligibility age is the age at which a retired
Other Adjustments
worker can first claim benefits (age 62). The full retirement
In certain situations, other adjustments may apply. For
age (FRA) is the age at which the worker can receive the
example, the windfall elimination provision may reduce
full PIA increased by any COLAs. For workers born in
benefits for worker beneficiaries with pensions from
1960 or later, the FRA is age 67.
uncovered Social Security employment, the government
pension offset may reduce spousal benefits for spouses with
The permanent reduction in monthly benefits that applies to
government pensions from uncovered Social Security
people who claim before the FRA is an actuarial reduction.
employment, and the retirement earnings test may result in
It equals five-ninths of 1% for each month (6⅔% per year)
a temporary withholding of benefits for early claimants
for the first three years of early claim and five-twelfths of
(younger than FRA) with earnings above a certain level.
1% for each month (5% per year) beyond 36 months. The
permanent increase in monthly benefits that applies to those
Related Resources
who claim after the FRA is called the delayed retirement
CRS Report R46658, Social Security: Benefit Calculation,
credit (DRC). For people born after 1942, the DRC is 8%
provides a more detailed discussion of benefit computation,
for each year of delayed claim after the FRA up to age 70.
including calculations for a wider range of earnings levels,
COLAs
and briefly introduces the family maximum, which limits
total benefits that are payable to a beneficiary’s family.
A 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
Barry F. Huston, Analyst in Social Policy
https://crsreports.congress.gov
Social Security: Benefit Calculation Overview
IF11747
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