Social Security: Benefit Calculation Overview

Social Security: Benefit Calculation Overview

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Updated November 8, 2022
Social Security: Benefit Calculation Overview
Background
Earnings that were not covered (i.e., not subject to the
Old-Age and Survivors Insurance (OASI) and Disability
Social Security payroll tax) are not included.
Insurance (DI), referred to on a combined basis as OASDI,
Under current law, the Social Security payroll tax is applied
are social insurance programs that protect workers and their
to covered earnings up to an annual limit, or taxable
family members against a loss of income due to old age,
maximum ($160,200 in 2023). This level of earnings is
disability, or death. These programs are often referred to as
both the contribution base (i.e., amount of covered earnings
Social Security. Most Social Security beneficiaries are
subject to the Social Security payroll tax) and the benefit
retired or disabled workers whose monthly benefits depend
base (i.e., amount of covered earnings used to determine
on their past earnings, their age, and other factors. Benefits
are also paid to workers’
benefits). Earnings in excess of the taxable maximum are
eligible dependents and survivors
not included in benefit calculations. The taxable maximum
based on the worker’s earning record.
is indexed to national average wage growth for years in
This In Focus provides an overview of the computation of
which a cost-of-living adjustment (COLA) is payable.
Social Security benefits. The examples used throughout are
Rather than using the amounts earned in past years directly,
for those of a hypothetical medium earner—a worker who
the AIME computation process first updates past earnings
consistently earned at a medium level—born in 1953 (the
up to the taxable maximum to account for the growth in
most recent year for which complete information on
overall economy-wide earnings. That is done by increasing
indexed earnings and program-specific factors are known).
each year of a worker’s taxable earnings after 1950 by
From 2016 through 2021, roughly 30% of workers retiring
growth in average earnings in the economy, as measured by
had career-average earnings at about the medium level (see
“
the AWI, from the year of work until two years prior to
Related Resources”).
eligibility for benefits, which for retired workers is at age
Eligibility and Insured Status
60. For instance, the national average wage grew from
About 94% of workers earn wages or income in Social
$32,155 in 2000 to $41,674 in 2010. So if a worker earned
Security–covered employment. While working in covered
$20,000 in 2000 and turned 60 in 2010, the indexed wage
employment, workers earn quarters of coverage (QCs). In
for 2000 would be $20,000 × ($41,674/$32,155), or
2023, a worker will earn one QC for every $1,640 of
$25,921. Earnings from later years—for retired workers at
earnings, up to four QCs per year. A worker who earns at
ages 60 and above—are not indexed.
least $6,560 in covered employment at any point in 2023 is
credited with the maximum number (four) of QCs for that
Number of Years
year. The level of earnings needed for a QC generally
For retired workers, the AIME equals the average of the
increases annually with growth in average earnings in the
highest 35 years of indexed earnings divided by 12 (to
national economy, as measured by Social Security’s
change the benefit from an annual to a monthly measure).
Average Wage Index (AWI).
Those years of earnings are known as computation years. If
the person worked fewer than 35 years in employment
To be eligible for benefits, workers must be fully insured.
subject to Social Security payroll taxes, the computation
Fully insured status requires one QC for each year elapsed
includes those as years of zero earnings. The number of
after the worker turns 21 years old—with a minimum of six
computation years for disabled or deceased workers may be
QCs and a maximum of 40 QCs—through the year before
fewer than 35 years.
the worker attains age 62, the year before the worker dies,
or the year before the worker becomes disabled. A worker
The sum of the highest 35 years of wage-indexed earnings
is first eligible for Social Security retirement benefits at age
for a hypothetical medium earner born in 1953 is
62, so to be eligible for retirement benefits, a worker must
$1,565,493.44. (Wage-indexed earnings are rounded to the
generally have worked for 10 years.
nearest cent.) This sum figure is then divided by 420 (the
number of months in 35 years) to determine the worker’s
Average Indexed Monthly Earnings
AIME, or $3,727.00. (AIMEs are rounded down to the
The first step in determining Social Security benefits
nearest dollar.)
amounts for eligible workers is to compute the average
indexed monthly earnings (AIME), a measure of a worker’s
Primary Insurance Amounts
past earnings.
The next step in determining the Social Security benefit
amount is to compute the primary insurance amount (PIA).
Wage Indexing
To do this, the AIME is sectioned into three brackets (or
A worker’s benefit amount is based on his or her earnings
segments) of earnings, which are divided by dollar amounts
during covered employment. Only earnings from years of
known as bend points. In 2023, the bend points are $1,115
covered employment are included in the calculation.
and $6,721. Those amounts are indexed to the AWI, so they
generally increase each year.
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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 will receive a
progressive benefit formula. The formula results in a
COLA of 8.7% for benefits paid in January 2023.
progressive replacement rate, which is measured as the
Adjustments to the PIA for early or late claiming (relative
percent of AIME that the PIA replaces. The replacement
to a worker’s FRA) interact with COLAs to produce the
rate is higher for lower earners—83% for very low
actual benefit amount. These two factors affect all
earners—than for higher earners—37% for high earners
(see “
claimants, while other adjustments may affect only some
Related Resources”). The formula also results in
claimants (see “Other Adjustments”). Table 2 shows how
individual equity: The more a worker earns (and pays in
adjustments for claiming age work together with COLAs to
payroll tax), up to the taxable maximum, the higher the
produce benefit amounts before other adjustments.
PIA. Table 1 shows how to calculate the PIA for a
hypothetical medium earner born in 1953.
Table 2. Initial Monthly Benefit Amounts for
Table 1. Computation of Primary Insurance Amount
Hypothetical Medium Earner Born in 1953, by
(PIA) for Hypothetical Medium Earner Born in 1953
Claiming Age
Primary Insurance Amount (PIA) adjusted for claiming age
Brackets of
Medium Earner
relative to full retirement age (FRA) and cost-of-living
Factors
AIME in 2015
(AIME of $3,727.00)
adjustments (COLAs)
90%
first $826 of AIME,
$743.40
Benefit
plus
Claiming Percent
Amount
Year
COLA
32%
AIME over $826 and
Age
of PIA
(PIA of
928.32
through $4,980, plus
$1,671.70)
15%
AIME over $4,980
0.00
2015
62
75.0%
-
$1,253.00
Total: Worker’s PIA (by law,
2016
63
80.0%
0.0%
1,337.00
1,671.70
rounded down to nearest 10 cents)
2017
64
86.6%
0.3%
1,453.00
Source: CRS.
Notes: The bend points shown in the table apply to workers who
2018
65
93.3%
2.0%
1,596.00
first become eligible in 2015 (i.e., the year in which a hypothetical
medium earner born in 1953 reaches age 62). Under current law, PIA
2019
66
100.0%
2.8%
1,758.00
is rounded down to the nearest dime (42 U.S.C. §415(a)(1)(A)).
2020
67
108.0%
1.6%
1,929.00
Benefit Amounts
2021
68
116.0%
1.3%
2,099.00
The PIA is further adjusted for age at benefit claiming and
2022
69
124.0%
5.9%
2,376.00
for COLAs to determine the benefit received by the worker.
2023
70
132%
8.7%
2,749.00
Adjustments for Claiming Age
Source: CRS.
The earliest eligibility age is the age at which a retired
Notes: Under current law, monthly benefit amounts are rounded
worker can first claim benefits (age 62). The full retirement
down to the nearest dollar (42 U.S.C. §415(g)).
age (FRA) is the age at which the worker can receive the
full PIA increased by any COLAs. For workers born in
Other Adjustments
1960 or later, the FRA is age 67.
In certain situations, other adjustments may apply. For
example, the windfall elimination provision may reduce
The permanent reduction in monthly benefits that applies to
benefits for worker beneficiaries with pensions from
people who claim before the FRA is an actuarial reduction.
uncovered Social Security employment. The government
It equals five-ninths of 1% for each month (6⅔% per year)
pension offset may reduce spousal benefits for spouses with
for the first three years of early claim and five-twelfths of
government pensions from uncovered Social Security
1% for each month (5% per year) beyond 36 months. The
employment. The retirement earnings test may result in a
permanent increase in monthly benefits that applies to those
temporary withholding of benefits for early claimants
who claim after the FRA is called the delayed retirement
(younger than FRA) with earnings above a certain level.
credit (DRC). For people born after 1942, the DRC is 8%
for each year of delayed claim after the FRA up to age 70.
Related Resources
COLAs
CRS Report R46658, Social Security: Benefit Calculation,
provides a more detailed discussion of benefit computation,
A COLA is applied to the benefit beginning in the second
including calculations for a wider range of earnings levels,
year of eligibility, which for retired workers is age 63. The
and briefly introduces the family maximum, which limits
COLA applies even if a worker has not yet begun to receive
total benefits that are payable to a beneficiary’s family.
benefits. The COLA usually equals the growth in the
Consumer Price Index for Urban Wage Earners and Clerical
Workers from the third quarter of one calendar year to the
Barry F. Huston, Analyst Social Policy
third quarter of the next calendar year. The COLA becomes
IF11747

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Social Security: Benefit Calculation Overview

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