Understanding How Social Security Benefits Are Calculated

Almost 50 million older Americans received monthly Social Security retirement benefits. For most of them, it is an essential source of retirement income. According to an article by The Motley Fool, the program is responsible for keeping more than 50 million seniors out of poverty. That’s why Social Security is widely considered “the most successful anti-poverty program in U.S. history.”

Benefits Calculator

How much money each retiree receives is determined based on three variables: work history, lifetime earnings and claiming age. All three impact the Social Security benefits formula. It’s really not all that complicated. It involves two simple steps — calculate the primary insurance amount (PIA) and apply any reductions or credits based on claiming age. Let’s walk through it.

Step 1: Begin by calculating the average indexed monthly earnings (AIME) amount. This is determined by looking at the monthly average of your income from the 35 highest-paid years of work adjusted for wage inflation. Your AIME is then run through the Social Security benefits formula to determine the PIA, which is the payout at full retirement age (FRA).

Step 2: Benefit amounts are reduced for retired workers who claim Social Security before FRA. While retirees who claim Social Security after FRA receive higher benefits, meaning they get more than 100 percent of their PIA. For most retirees that can mean hundreds of dollars more each month.

According to the article, despite the draw of a much bigger benefit, very few workers wait until after FRA to start collecting Social Security. It reports that “last year, nearly one-quarter of newly awarded retired workers started collecting benefits at age 62, and more than one-half started Social Security before FRA. Less than 10 percent waited until age 70.”

Bigger Benefits for All

The Seniors Trust wants all retirees to receive bigger Social Security benefits. That’s why we support the Social Security Expansion Act. If passed, this landmark piece of legislation will make four major changes to Social Security for retirees:

• Benefits will be increased for most recipients by about $200 per month.

• The Consumer Price Index for the Elderly (CPI-E) will be used to calculate Social Security Cost-of-Living Adjustments (COLAs) instead of the Consumer Price Index for Urban Wage Earners (CPI-W) used currently. The CPI-E takes the unique spending habits of seniors into account — particularly regarding the cost of healthcare — and offers a more realistic COLA for retirees.

• Increase minimum Social Security benefits to provide higher payments to seniors and greatly reduce senior poverty.

• Providing enhanced benefits would be set to greatly reduce senior poverty to guarantee the long-term solvency of the Social Security program.