Appendix D: Computing a Retired-Worker Benefit
This section provides instructions and a worksheet for computing a retired-worker benefit for persons born in the years 1943 through 1958—that is, those who attained age 62 from 2005 through 2020. The worksheet assumes that the worker had no prior period of entitlement to disability benefits and did not work after becoming entitled to retired-worker benefits.
The worksheet describes the various steps used in computing a benefit. The steps are based on the following Social Security program goals:
- To provide a benefit based on lifetime earnings. Benefits are related to the 35 highest earnings years (the number of computation years), but only for years after 1950. If there are fewer than 35 years with earnings, then years of no earnings are included among the 35 computation years.
- To index lifetime earnings. Earnings used in the computation are not the actual covered earnings but an amount that reflects earnings increases in average wage levels for each year after the earnings were paid. This procedure is termed wage indexing. Currently, earnings are generally indexed to wage levels in the year the worker turns age 60. For example, for a person attaining age 62 in 2020, actual earnings in 1990 of $20,000 are indexed to $49,596.59, on the basis of 2018 wage levels. Earnings after age 60 are included at their actual (nominal) value.
- To replace a portion of the indexed earnings. Indexed earnings are averaged over the number of computation years to calculate the average indexed monthly earnings (AIME). A benefit formula is applied to the AIME as the first step in computing the primary insurance amount (PIA), the amount payable to a worker who retires at the full retirement age (FRA). The benefit formula is weighted to provide a higher replacement of earnings for lower-wage workers. The formula for persons aged 62 in 2020 is 90 percent of the first $960 of AIME; plus 32 percent of the next $4,825; plus 15 percent of the AIME over $5,785.
- To permit early retirement. Persons can retire as early as age 62, but the monthly benefit is reduced. This reduction applies to all future benefits. The reduction is calculated as 5⁄9 of 1 percent for each month immediately preceding the FRA, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5⁄12 of 1 percent per month. For a person aged 62 in 2020, the maximum reduction is 28.333 percent if the individual is entitled to benefits for all 56 months between ages 62 and 66 and 8 months.
- To provide for price indexing after age 62. Benefits are adjusted annually in December to reflect increases in the Consumer Price Index (CPI-W). The benefit increase in 2019 was 1.6 percent. These cost-of-living adjustments are applied to the benefit for each year after the person attained age 62—even if the person was not actually receiving benefits.
- To give credit for earnings after age 61. Earnings after age 61 (which are not indexed) can be substituted for earnings in earlier years if they result in a higher benefit.
- To give credit for late retirement. Persons who initiate benefits after FRA may receive increased benefits as a result of the delayed retirement credit provision. The benefit is increased by a specified percentage for each month between FRA and age 70 a benefit is deferred. See Table 2.A20 for percentage increases.
Clarifying the Worksheet Procedure
Step 1 - Wage Indexing of Earnings
The following description and examples are provided for persons who wish to compute the index factors and indexed earnings. The indexing year is the year a person attains age 60. Beneficiaries born on January 1 are deemed to have attained age 60 on December 31 of the prior year.
The average wage for the indexing year is divided by the average wage in each prior year to obtain the factor for each prior year. For example, for a person attaining age 62 in 2020, the indexing year is 2018. The average annual wage for 2018 was $52,145.80. The average annual wage for 1990 was $21,027.98. The amount $52,145.80 divided by $21,027.98 yields a factor of 2.4798293.
The worker's actual earnings covered under Social Security in that year, up to the maximum earnings creditable, are multiplied by the indexing factor to obtain the indexed earnings (see Worksheet 1). For example, actual covered earnings of $10,000 in 1990, multiplied by 2.4798293, result in indexed earnings of $24,798.29; actual earnings of $51,300 (the maximum creditable) result in indexed earnings of $127,215.24.
Step 2 - Computing the Average Indexed Monthly Earnings (AIME)
After the earnings in each year have been indexed, they are used in computing average indexed monthly earnings. The years of highest indexed earnings corresponding to the number of computation years are selected and totaled. This total is then divided by the number of months in the computation years. The result, rounded to the nearest lower dollar, is the average indexed monthly earnings.
For example, for a person attaining age 62 in 2020, the highest 35 years of indexed earnings are used. If the sum of these earnings equals $400,000, the AIME is $952 ($400,000 divided by 420 months = $952.38, rounded to $952).
Step 3 - Computing the Primary Insurance Amount (PIA)
The PIA, the amount from which all Social Security benefits payable on a worker's earnings record are based, is computed by applying (1) a formula to the AIME and (2) cost-of-living adjustments (COLAs) to the formula's result. Amounts are rounded to the nearest lower 10 cents at each computation step.
The PIA formula consists of three AIME brackets, to each of which a given percentage applies. The dollar amounts defining the brackets are called bend points, and the bend points are different for each calendar year of attainment of age 62. The percentages—90 percent for the first bracket, 32 percent for the second bracket, and 15 percent for the third bracket—are consistent from year to year.
For retired workers who attained age 62 in 2020, the bend points are $960 and $5,785. Thus the formula is 90 percent of the first $960 of AIME; plus 32 percent of the next $4,825 of AIME; plus 15 percent of AIME above $5,785. The following examples illustrate the computations for workers with different AIME amounts.
Example 1 - AIME of $700
Result is $630
Based on: 90 percent of $700
Example 2 - AIME of $1,500
Result is $1,036.80, rounded to $1,036.80
Based on: 90 percent of $960 ($864.00); plus
32 percent of $540 ($172.80)
Example 3 - AIME of $6,000
Result is $2,440.25, rounded to $2,440.20
Based on: 90 percent of $960 ($864.00); plus
32 percent of $4,825 ($1,544.00); plus
15 percent of $215 ($32.25)
The above calculations are applicable to workers who attain age 62 in 2020. For workers who attained age 62 in prior years, the bend points are different, and the result of the computation must be increased to reflect COLAs between the year of attainment of age 62 and 2020. Worksheet 2 shows bend points and COLA factors for 2005 through 2020.
For example, a worker who attained age 62 in 2017 would receive COLAs for the years 2017–2019. The adjustments are cumulative, with each step rounded to the next lower dime. Continuing from Example 1 above, the COLA computations would be:
2017: $630 multiplied by 1.020 = $642.60
2018: $642.60 multiplied by 1.028 = $660.59, rounded to $660.50
2019: $660.50 multiplied by 1.016 = $671.07, rounded to $671.00
$671.00 would be the PIA effective December 2019.
Step 4 - Computation of the Monthly Benefit
The PIA is payable to a worker who claims at the full retirement age (FRA). In 2000, workers reaching age 62 were the first to be affected by incremental increases in the FRA—from age 65 for workers born before 1938 to age 67 for workers born 1960 and later.
Early retirement reduces benefits:
Workers can retire as early as age 62, but the monthly benefit is reduced. The reduction is calculated as 5⁄9 of 1 percent for each month immediately preceding the FRA, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5⁄12 of 1 percent per month. Workers attaining age 62 in 2020 have their benefits computed based on the FRA of 66 and 8 months. See Table 2.A17.1 to determine the FRA based on the year of birth as well as the benefit reduction factors. For individuals electing benefits at age 62 in 2020, the maximum reduction is 28.333 percent.
For example, in 2020 a worker with a PIA of $700 would receive $501 at age 62. The PIA is reduced by $198.33, reflecting a reduction rate of 5⁄9 of 1 percent for each of the first 36 months and a reduction rate of 5⁄12 of 1 percent for each of the additional 20 months for a total reduction of 28.333 percent. After reducing the PIA by $198.33, the result ($501.67) is rounded to the next lower dollar. This is the monthly benefit amount.
Delayed retirement increases benefits:
Delayed retirement increases the benefit amount (by a certain percentage depending on a person's date of birth) if the worker delays retirement beyond FRA. Benefit increases stop accumulating when the worker reaches age 70, even if he or she continues to delay taking benefits. Delayed-retirement increases begin to apply to benefits in January of the year following the year the worker reaches FRA. The credit given for delayed retirement is 8 percent per year (16⁄24 of 1 percent monthly) for those born 1943 and later. See Table 2.A20 for percentage increases.
For example, a worker born in June 1954 reached FRA in June 2020. If the worker delayed receiving benefits until November 2020 (5 months after FRA), his or her benefit is 103.333% of the PIA. If the worker's PIA is $700, the credit for delayed claiming brings that amount to $723.33. That amount, rounded to the nearest lower dollar ($723), is the monthly benefit amount.
Deductions and other adjustments:
Depending on an individual's circumstances, the monthly benefit amount that results from these computations may be subject to adjustments. For details, see https://secure.ssa.gov/poms.nsf/lnx/0300601020.
|STEP 1.—Indexing of Earnings (Use Worksheet 1 for Steps 1 and 2.)|
|1||Enter in column 2 your earnings in each year 1951 through 2019. If none, enter “0.”|
|2||Column 3 contains the maximum earnings creditable under Social Security for each year.|
|3||Enter in column 4 the lower amount from columns 2 or 3 for each year.|
|4||Enter in column 5 the indexing factors applicable to the year you attained age 62 from Table 2.A8.
(This table contains the indexing factors for persons attaining age 62 during the period 2005–2020.)
|5||Multiply column 4 by column 5 and enter results in column 6 in dollars and cents. These are your indexed earnings.|
|STEP 2.—Computing the Average Indexed Monthly Earnings (AIME)|
|6||Place an “X” in column 7 next to each of the 35 highest indexed earnings entries.|
|7||Add all individual indexed earnings marked with an “X.”|
|8||Number of months in the computation period (35 × 12).||420|
|9||Divide line 7 by line 8.|
|10||Round the result in line 9 to the next lower dollar. This is your average indexed monthly earnings (AIME).|
|STEP 3.—Computing the Primary Insurance Amount (PIA) (Use Worksheet 2 for Step 3.)|
|11||Enter first bend point from Worksheet 2 based on year of attainment of age 62. (If your birthday is January 1, enter prior year.)|
|12||Enter second bend point from Worksheet 2.|
|13||If your AIME (obtained in line 10) is equal to or less than line 11, complete line 14, otherwise skip to line 15.|
|14||Multiply line 10 by 0.9. (If you receive a pension on the basis of noncovered employment, see Table 2.A11.1.) Round to next lower dime and enter the result. Continue with line 24.|
|15||If your AIME (obtained in line 10) is greater than line 11 but less than or equal to line 12, complete lines 16–18, otherwise skip to line 19.|
|16||Multiply line 11 by 0.9. (If you receive a pension on the basis of noncovered employment, see Table 2.A11.1.)|
|17||Subtract line 11 from line 10 then multiply by 0.32.|
|18||Add line 16 to line 17, and round to next lower dime and enter the result. Continue with line 24.|
|19||If your AIME (obtained in line 10) is greater than line 12, complete lines 20–23.|
|20||Multiply line 11 by 0.9. (If you receive a pension on the basis of noncovered employment, see Table 2.A11.1.)|
|21||Subtract line 11 from line 12 then multiply by 0.32.|
|22||Subtract line 12 from line 10 then multiply by 0.15.|
|23||Add lines 20, 21, and 22, and round to the next lower dime and enter the result. Continue with line 24.|
|24||If you attained age 62 in 2020, skip to line 30. Otherwise you will need to adjust your computation to reflect cost-of-living adjustments (COLAs) from the year you attained age 62 through 2019 by using lines 25–29 and Worksheet 2.|
|25||Enter year of attainment of age 62.|
|26||Place an “X” corresponding to the year you attained age 62 in column 5 (Worksheet 2).|
|27||Place an “X” in column 5 (Worksheet 2) next to each subsequent year through 2019.|
|28||Enter your result from either line 14, 18, or 23—here and in the first row of column 6 (Worksheet 2).|
|29||Beginning with first year marked in Worksheet 2, multiply your benefit formula result (from line 28 above) by the corresponding factor (column 4), round to the next lower dime, and enter in column 6. The resulting amount is then multiplied by the next factor and is again rounded to the next lower dime. Continue this process through 2019. Enter this last figure, which is your PIA effective December 2019.|
|STEP 4.—Computing the Monthly Benefit|
|30||Enter the PIA from either line 14, 18, 23, or 29.|
|31||Using Table 2.A17.1, determine your full retirement age and enter here.|
|32||If you retired at your full retirement age, round the PIA from line 30 to the next lower dollar to obtain your monthly benefit. If you retired before the full retirement age, skip to line 33. If you retired after the full retirement age, skip to line 43.|
|33||If you retired before the full retirement age, enter your age at retirement in years and months, and complete lines 34–42.|
|34||Subtract line 33 from line 31, and convert the result to months to determine the total number of reduction months.|
|35||If line 34 is greater than 36 reduction months, subtract 36 months and enter the result here.|
|36||“0.0055556” (the decimal equivalent of 5⁄9 of 1 percent—the monthly reduction factor for the first 36 months) has been entered.||0.0055556|
|37||“0.0041667” (the decimal equivalent of 5⁄12 of 1 percent—the monthly reduction factor for months above 36) has been entered.||0.0041667|
|38||Multiply line 34 (but not more than 36 months) by line 36 to obtain the percent reduction for the first 36 months.|
|39||Multiply line 35 by line 37 to obtain the percent reduction for months in excess of 36.|
|40||Add line 38 to line 39 to obtain the total percent reduction.|
|41||Multiply line 30 by line 40 to obtain the amount of benefit reduction.|
|42||Subtract line 41 from line 30, and round to the next lower dollar to obtain your monthly benefit.|
|43||If you retired (or plan to retire) after the full retirement age, enter your actual (or planned) age at retirement in years and months, and complete lines 44–48. If you worked (or plan to work) after attaining age 70, enter “70 years 0 months.”|
|44||Subtract line 31 from line 43, and convert the result to months to determine the total number of delayed months.|
|45||“0.006667” (the decimal equivalent of 16⁄24 of 1 percent—the monthly percentage increase for persons born 1943 or later) has been entered.||0.006667|
|46||Multiply line 44 by line 45 to obtain the total percent increase.|
|47||Multiply line 30 by line 46 to obtain the amount of benefit increase.|
|48||Add line 30 to line 47, and round to the next lower dollar to obtain your monthly benefit.|
|NOTE: The final benefit amount may be adjusted to account for Medicare premium deductions and other factors that apply case by case.|
|Year||Your earnings||Maximum taxable earnings ($)||Lower of columns 2 or 3||Indexing factor||Column 4 times column 5||Highest indexed earnings|
|Cost-of-living increase (%)||Cost-of-living factor||Years aged 62 or older||Incremental COLA computation ($)|
|Benefit formula result
(line 28 of instructions):
|2020||960||5,785||. . .||. . .|
|NOTE: . . . = not applicable.|
|CONTACT: (410) 965-0090 or email@example.com.|