If you're like most current and future retirees in the United States, chances are good you're going to receive Social Security retirement benefits. These benefits are earned when you pay payroll taxes throughout your career. You can also get benefits on a spouse's work record if you don't work and earn enough on your own to get benefits. 

Not everyone receives the same Social Security benefits. In fact, your benefits are based on many factors including the age when you claim benefits, how much you earned over your career, and how many years you worked and paid into the Social Security system. 

It's helpful to understand how Social Security benefits work, so you can estimate the amount of money you'll receive and understand the factors that increase or decrease your benefits. Learning the Social Security benefit formula is the best way to develop this understanding. This guide will explain what the Social Security benefit formula is and how this formula is used to determine the monthly income you'd receive if you claim benefits at different ages.

Older couple reviewing financial paperwork.

Image source: Getty Images.

What is the Social Security benefits formula?

The Social Security benefits formula is a formula used to determine your primary insurance amount, or the amount of money you'd be entitled to if you claimed benefits at the age designated by law as your full retirement age. If you claim benefits before full retirement age -- aged 65 to 67 depending, when you were born --  you'll receive a smaller benefit than the primary insurance amount. If you claim benefits after, you will receive a larger benefit. 

The Social Security benefits formula used to determine your primary insurance amount is:

  • 90% of average indexed monthly earnings (AIME) up to a first bend point. Bend points are income limits set each year based on changes to the Average Wage Index, which is a measure of wage trends. 
  • 32% of AIME between a first and second bend point
  • 15% of AIME above the second bend point

AIME is calculated by taking wages earned over your career and adjusting for inflation using the Average Wage Index. The Social Security Administration adds up inflation-adjusted wages for the 35 years you earned the most, divides by 35 to get your average annual wage, then divides by 12 to get your average monthly wage. This is the AIME used in the formula. 

What is the Social Security benefits formula for 2019?

The Social Security benefits formula that applies to determine your primary insurance amount is the formula in effect when you turn 62. The percentage of AIME you receive never changes, but the bend points do. In 2019, the bend points are $926 and $5,583. So, if you turn 62 in 2019, the Social Security benefits formula that would apply to determine your benefits is:

  • 90% of the first $926 in AIME
  • 32% of the amount of AIME between $926 and $5,583
  • 15% of the amount equal to or greater than $5,583 in AIME

How does the Social Security benefits formula determine my benefits?

These are the six steps involved in using the Social Security benefits formula to determine benefits you'll receive. 

1. Determine wages for each year you worked

You can get your earnings records from the Social Security Administration. Simply sign into mySocialSecurity and click "View Earnings Record." You will need to create an account if you don't already have one.

Your earnings record will list your wages for every year you worked and paid into the Social Security system. However, you're only given credit for wages you paid Social Security tax on.

There's a maximum annual limit on wages subject to Social Security tax. No income earned above the annual limit counts toward determining your benefits. In 2019, the maximum earnings subject to Social Security tax are $132,900. If even if you earned $132,900.01 or above, wages for 2019 for Social Security purposes would be recorded as $132,900. 

2. Adjust your wages for inflation 

The Social Security Administration uses the Average Wage Index to adjust wages for inflation. The average wage index is a measure of U.S. wages. The AWI that applies to adjust your wages for inflation is the AWI in effect two years before you become eligible for Social Security. You become eligible for Social Security at 62, so you're subject to the AWI in effect in the year you turn 60. 

The table below shows the AWI for the past several years -- and you can find a complete list of AWIs dating back to 1951 on the Social Security Administration website.  

Year AWI
2017 $50,321.89
2016 $48,642.15
2015 $48,098.63
2014 $48,481.52
2013 $44,888.16
2012 $44,321.67

Table source: Social Security Administration.

If you turned 62 in 2019, you'd use the 2017 AWI -- $50,321.89 -- to determine how to adjust each year's wages for inflation. The formula to adjust your wages requires you to:

  • Divide the AWI in effect the year you turn 62 by the AWI in effect in the year you're adjusting the wages for. This will give you the indexing factor.
  • Multiply the relevant year's wage by the indexing factor to determine your inflation-adjusted wage. 

Here's how this formula works in practice:

  • To adjust your wages from 2012, divide $50,321.89 (AWI in the year you turned 62) by $44,321.67 (AWI from 2012). This gives you an indexing factor of 1.135. Multiply your 2012 earnings by the indexing factor for that year. If you earned $40,000 in 2012, your index-adjusted wage would be $45,400 ($40,000 times the 1.135 indexing factor).
  • To adjust your wages from 2013, figure out the indexing factor by dividing $50,321.89 by $44,888.16 (the AWI in 2013). The indexing factor is 1.121. Multiply 2013 earnings by 1.121. If you earned $41,000, your index-adjusted wage would be $45,961 ($41,000 * 1.121). 

Do this math for each year you have earnings to figure out that year's index-adjusted wage. 

The Social Security Administration also lists indexing factors on its website for the current eligibility year. You can look up the indexing factors that apply and multiply each year's indexing factor by the relevant year's wages. This will give you your index-adjusted wage for every year you worked. 

3. Calculate your AIME

Once you know how much your index-adjusted wage is for each year, add together the total amount of inflation-adjusted wages earned in the 35 years you earned the most. So, based on our above examples, you would add in $45,400 for 2012 + $45,961 for 2013 and so on for each of the 35 years with the highest index-adjusted income.  

Next, divide by 35 to get your annual average, and divide this number by 12 to get your average indexed monthly earnings (AIME).

Say you added up all of your index-adjusted wages in the 35 years you earned the most, and you got $2,600,000. Divide $2,600,000 to see that your average annual adjusted wage is around $74,285.71. Divide by 12 to get an AIME of $6,190.48. 

If you worked less than 35 years, you will have years of $0 wages factored in. If you only worked 30 years, you'd add in 5 years of $0 wages when determining your average. Obviously, years of $0 wages lower your AIME. 

4. Apply the Social Security benefits formula to AIME 

Once you know your AIME, put it into the Social Security benefits formula using the bend points in effect in the year that you turn 62. The table below shows the bend points that have applied in recent years:

Year First Bend Point Second Bend Point
2014 $816 $4,917
2015 $826 $4,980
2016 $856 $5,157
2017 $885 $5,336
2018 $895 $5,397
2019 $926 $5,583

Data source: Social Security Administration.

If you turn 62 in 2019, the bend points to use in your Social Security benefits formula are $926 and $5,583. So, if your AIME was $6,190.48 as calculated above, here's how your benefits would be calculated:

  • 90% of $926 = $833.40
  • 32% of $5,583-$926 = $1,490.24
  • 15% of $6,190.48-$5,583 = $91.12

Your primary insurance amount would be $833.40 + $1,490.24 + $91.12 = $2,414.76. 

If you turned 62 in 2018, different bend points apply: $895 and $5,397. So, if your AIME was $6,190.48, your primary insurance amount in 2018 would be $2,365.16:

  • 90% of the first $895 = $805.50
  • 32% of $5,397-$895 = $1,440.64
  • 15% of $6,190.48-$5,397 = $119.02

$805.50 + $1,440.64 + $119.02 = $2,365.16. 

5. Apply cost-of-living adjustments 

If you claim benefits after 62, you'll be entitled to an increase in your primary insurance amount based on cost-of-living adjustments for each subsequent year. 

COLAs are calculated based on increases in cost of living as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). You can see COLAs on the Social Security website for the years 1975 to 2019. 

Say your primary insurance amount -- as calculated in 2019 when you turn 62 -- is $2,414.76. If there's a 2% cost-of-living adjustment from 2019 to 2020, you'd apply the COLA, so your primary insurance amount the next year would become $2,463.06 (2% more than $2,414.76). If there's a 1% COLA adjustment from 2020 to 2021, your primary insurance amount the next year would be $2,487.69 (1% more than $2,463.06). 

6. Adjust your primary insurance amount if you claim benefits before or after full retirement age

All the above calculations determine the primary insurance amount if you claim benefits at full retirement age -- but you may decide to claim benefits before or after FRA. You can claim benefits as early as age 62. But if you claim benefits before FRA, your benefits are decreased by:

  • 5/9 of 1% per month for each month prior to FRA for the first 36 months
  • 5/12 of 1% per month for each additional month if you claim more than 36 months before FRA

If you claim benefits after FRA, benefits are increased by 2/3 of 1% for each month you wait up until age 70.

The table below shows FRA depending on your birth year:

If You Were Born in Your FRA Is
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

Table source: Social Security Administration.

Depending when your FRA is, you'd apply the benefits reduction or increase to your primary insurance amount. For example:

  • If FRA is 67 and you claim benefits at 66, that's 12 months early. Multiply the per month-reduction ((5/9)*.01) times 12 months to see that benefits are reduced by around 6.7%. 
  • If FRA is 66 and you claim benefits at 62, that's 48 months early. Multiply the per month-reduction for the first 36-months ((5/9)*.01) times 36 months + the additional reduction of ((5/12)*.01) times 12 months. This gives you 0.20 + 0.05, which amounts to a 25% reduction in your primary insurance amount. 
  • If FRA is 67 and you claim benefits at 69, that's 24 months late. Multiply the per-month increase ((2/3)*.01) times 24 months to see benefits are increased by 16%. 

Adjusting your primary insurance amount up or down based on the age when you claim benefits will let you know exactly what your benefits will be. 

Now you know how the Social Security benefit formula works

Now you know exactly how the Social Security benefit formula works. To sum it all up:

  • Calculate Average Indexed Monthly Earnings (AIME). Do this by applying an indexing factor to each year of earnings to adjust for inflation; adding together your highest 35-years of adjusted earnings; dividing by 35 to find your annual indexed earnings; and dividing by 12 to determine your monthly indexed earnings. The indexing factor is determined by the Average Wage Index (AWI) in the year you turn 60. 
  • Apply the Social Security benefits formula to your AIME to calculate your primary insurance amount. You'll receive 90% of AIME up to a first bend point; 32% of AIME between the first and second bend point; and 15% of AIME above the second bend point. Bend points are income levels determined by the Average Wage Index in effect the year you turn 62. 
  • Adjust your primary insurance amount based on cost-of-living increases for each year after you turn 62 but before retirement. COLAs are determined each year using CPI-W, which is a measure of inflation that looks at increases in consumer prices for urban wage earners and clerical workers. 
  • Receive your primary insurance amount if you claim benefits at full retirement age, which is between 65 and 67 depending on your year of birth. 
  • If you claim benefits before full retirement age, you'll reduce your primary insurance amount by 5/9 of 1% per month for the first 36 months early and by 5/12 of 1% for each prior month early. 
  • If you claim benefits after full retirement age, you'll increase your primary insurance amount by 2/3 of 1% per month up until the age of 70. 

So, while the Social Security benefits formula may seem simple since you're just adding up different percentages of your average earnings over 35 years depending how much you earn, there's obviously a lot more to applying the formula than first meets the eye. 

The Social Security benefits formula is progressive 

Social Security, in general, is meant to replace about 40% of pre-retirement income. As you can see, the formula works to do that for most workers. Remember our example of a person with an AIME of $6,190.48. His primary insurance amount came to around $2,414 which is about 39% of his average inflation-adjusted wage. 

However, the Social Security benefit formula is progressive. A progressive system redistributes income from people with higher lifetime average earnings to people with lower lifetime average earnings. It's easy to see that the benefits formula is progressive, because you get benefits equal to 90% of your AIME if you earned only a small amount of money -- but those who earned larger amounts get an ever-decreasing percentage of AIME factored into their benefits.

The result of this formula is that the ratio of lifetime benefits received by someone with lower earnings is higher, relative to payroll taxes paid, than the ratio of benefits-to-taxes-paid for a higher-earner. While higher earners do tend to live longer and collect benefits for more years, this only partly offsets the progressiveness of the benefits formula. 

The progressiveness of the formula is important, because lower-income people tend to have more difficulty saving for retirement than higher earners and thus rely more on Social Security to help keep them out of poverty during their senior years. Unfortunately, Social Security benefits alone still do not provide sufficient income for most retirees. Experts recommend that workers replace 70% or more of pre-retirement income during their retirement years while Social Security benefits are only designed to replace about 40%.

Social Security was supposed to be part of a three-legged stool designed to support retirees, with pensions and savings providing additional income and serving as the other two legs of the stool. However, with substantial savings shortfalls for many Americans, and few employers providing defined-benefit pension plans, some experts argue that Social Security benefits should be increased to provide a higher level of income to reduce senior poverty levels. 

Understanding the Social Security benefits formula is important 

Understanding the Social Security benefit formula is important, because you can shape your behavior to increase your benefits once you know the formula.

Throughout your career, you can work to increase your income so you have a higher average wage. If you have not worked for a full 35 years, you may also decide to work longer so you don't have any years of $0 wages factored in or so you have fewer $0s figured in your average. Or, if you are earning a much higher wage at the end of your career, you could stay in the workforce longer so some years of higher wages replace years of lower earnings. Finally, you could opt not to claim benefits until at least full retirement age or later so you get at least your primary insurance amount -- or more.  

Since Social Security is such an important source of income in retirement, it's worth learning how the Social Security benefits formula works and taking steps to maximize the benefits that will help support you as a senior.