How Are Social Security Benefits Calculated

The exact amount of your Social Security benefit is not computed until you turn 62.  At that time, all your annual earnings are indexed to account for wage inflation.

Once each year's earnings are indexed for inflation, your highest 35 years of earnings are tallied.  If you worked more than 35 years, only the highest 35 years will count.  If you worked less than 35 years, the missing years will count as zeros.  The 35 years of indexed earnings are totaled and divided by 420 (35 x12 months) to arrive at your average indexed monthly earnings, or AIME.

Let's use Boomer Bill as an example, Born in 1950, Bill earned the Social Security maximum throughout his career.  The maximum amount of wages subject to the Social Security tax is adjusted each year for inflation.  When his earnings are indexed and averaged, his AIME comes out to be $8238.

A three-part formula is applied to the AIME to arrive at your primary insurance amount, or PIA.  Below is how the formula would apply to Boomer Bill:

Peter Madine - Financial Consultation
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  Below is the formula that is used to pay your Social Security benefits:  dividerline   Maximum Wages Subject to Social Security Tax
  Please note: You do not have to figure this out yourself.  Peter can help you to better understand your benefits and calculate this formula for you:
  • The first $767 of the AIME is multiplied by 90%
  • The amount between $767 and $4,624 ($3,857) is multiplied by 32%
  • The amount over $4,624 ($8,238 - $4624 = $3,614, in this case) is multiplied by 15%
  • These are called "bend points," and they are adjusted slightly each year:

The PIA for a maximum wage earner born in 1950 would be:

$767 x .90 =         $690.30
$3,857 x .32 =    $1234.24
$3,614 x .15 =      $542.10
Total                  $2,466,64

Rounding to the next lower dime, Bill's PIA is $2,466.60.  This is the amount he will receive if he applies for benefits at age 66, his full retirement age.


The basic Social Security benefit is called the primary insurance amount (PIA).  Typically, the PIA is a function of average indexed monthly earnings (AIME).  The formula used depends on the year of first eligibility (the year a person attains age 62 in retirement cases).