The Social Security Administration recently announced its annual list of changes that are based on inflation -- cost-of-living adjustments, the taxable maximum earnings, and the "earnings test" limits are just a few examples.
In addition, the formula used to determine Social Security benefits is updated each year, also in response to inflation. While the general method to calculate benefits remains the same each year, the numbers used in the Social Security formula change to compensate for inflation each year. Here's a rundown of how the overall benefit calculation method works, what's changed for 2019, and who the changes apply to.
The method for calculating Social Security benefits
As I mentioned, the basic methodology by which Social Security benefits are calculated remains the same from year to year. If you aren't familiar, here's a quick explanation.
The Social Security Administration (SSA) keeps track of the money you earn each year in Social Security-covered employment, up to each year's taxable maximum. For example, the maximum taxable earnings amount in 2017 was $127,200, so that's the most that the SSA will track and eventually consider.
When determining your benefit, every year of your Social Security earnings record is indexed for inflation (you can find each year's multiplying factor on the latest version of the SSA's benefit calculation worksheet), and the 35 years with the highest adjusted earnings are considered.
These 35 indexed annual earnings amounts are then averaged together and divided by 12 in order to calculate your average indexed monthly earnings, or AIME.
Up until this point, the benefit formula remains the same from year to year.
Here's what is changing for 2019
Once your AIME is calculated, it's applied to a three-part formula to help determine your initial Social Security benefit. Your benefit will be based on 90% of a certain amount of your AIME, 32% of another portion, and if you've been a high earner, 15% of the rest.
The AIME thresholds that separate the three parts of the formula are known as the "bend points," and these are the parts of the formula that change every year.
With that in mind, the 2019 formula is:
- 90% of the first $926 of AIME.
- 32% of AIME greater than $926, but less than $5,583.
- 15% of AIME greater than $5,583.
This is the formula to calculate a beneficiary's primary insurance amount, or PIA. This is the amount that a beneficiary would be entitled to per month if they choose to start benefits at exactly their full retirement age. Taking Social Security before full retirement age -- as early as age 62 -- will result in permanently reduced benefits, whereas waiting until after full retirement age -- as late as age 70 -- will result in your PIA being permanently increased.
As an example, let's say that a beneficiary is considering claiming Social Security, and that their AIME is $5,000. Their PIA would be calculated as:
- 90% of $926, or $833.40, plus
- 32% of $4,074, or $1,303.68, for a total of $2,137.08
This amount would then be adjusted based on their full retirement age, and the age at which they chose to start collecting benefits.
The 2019 formula only applies to certain workers
Here's one very important point. The 2019 bend points mentioned in the previous section apply only to people who turn 62 in 2019, regardless of when they decide to claim benefits.
In other words, if you turn 62 in 2019, but don't start collecting your Social Security benefit until you turn 67 in 2024, the 2019 formula will still be used to calculate your benefit. To be clear, any earnings between now and then can absolutely be factored into your benefit, and updated inflation-indexing factors will be used when determining your AIME.
Similarly, if you claim Social Security benefits in 2019, but turned 62 in a previous year, you would use that year's bend points to calculate your PIA and initial benefit amount. You can find a historical list of bend points on the SSA's website.
A ballpark estimate of your future Social Security benefit
Because the Social Security formula that will be used to determine your future benefit will be based on the bend points in effect in the year you turn 62, there's no way to know what they may be.
However, you can get a good estimate of your future Social Security benefit based on your earnings history by viewing your most recent Social Security statement. You can do this by creating a mySocialSecurity account at www.ssa.gov, if you haven't done so already. In addition to a benefit estimate, there's a ton of valuable information available on your annual statement, so it's certainly worth the time.