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Social Security Benefit Determination

Posted on:9/27/2012
The Social Security Administration has changed its benefit formulas many times over the years. The current system, for all its complexity, is a much more streamlined structure than was the case previously.


The Social Security Administration has changed its benefit formulas many times over the years. The current system, for all its complexity, is a much more streamlined structure than was the case previously. There are three steps used in computing how much an eligible worker will receive in annual Social Security benefits.

 

First, the Social Security Administration summarizes each worker's lifetime earnings by computing a number known as the Average Indexed Monthly Earnings or the AIME. Second, a formula is applied to this earnings measure to come up with the Primary Insurance Amount or the PIA. The higher a worker's AIME, the higher the PIA. Third and finally, the Social Security Administration determines the individual's actual benefits based on the Primary Insurance Amount and the age at which he or she files for Social Security benefits.

 

The final step in determining Social Security benefits involves computing an individual's retirement benefits as a function of the PIA and age of retirement. In general, no benefits are provided at ages younger than 62, so that the benefit received is zero until age 62 for a worker who leaves the work force at ages 60 and 61.

 

Benefits for a 65-year-old retiree are exactly equal to the PIA, so the multiple applied at age 65 is effectively 100 percent (or 1.0). A worker waiting to retire until after age 65 receives a delayed retirement credit, which increases the PIA multiple by 3 percent for each year after age 65. 3 For example, someone retiring at age 68 receives a Social Security benefit that is 109 percent of (or 1.09 times) his or her PIA.


  
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