How Are Social Security Monthly Benefits Computed?

What you pay into Social Security in taxes doesn't equal what you get out. The Social Security Administration uses a benefits formula that takes into account not only how much you earned but how much wages have risen since then. That way, increases in the cost of living over time don't outpace your benefits.


The SSA starts off by looking at your lifetime earnings, year by year. Each year is multiplied by an index to align your earnings with present-day wages. If, for example, you earned $10,800 in 1973 and retired in 2013 at 67, the multiplier is 5.334 and your indexed earnings are equal to $57,569. Indexing gives older workers a much better deal than if the SSA treated $10,000 30 years ago like it was worth $10,000 in today's dollars.


Once your working years have been indexed, the SSA adds the total for up to 35 years of your career. If you have more than 35 years of work in your history, the agency picks the 35 with the highest indexed wages. The SSA then divides the total dollars by the total number of months and rounds it down. If, say, you worked 30 years for a total of $900,000, the SSA divides that by 360 months to get your average indexed monthly earnings of $2,500.


The SSA taxes your average earnings and applies more math to derive your primary insurance amount. For 2013, for example, the SSA starts by taking 90 percent of the first $791 of your average indexed monthly earnings. Then it adds 32 percent of the AIME between $791 and $4,768, plus 15 percent of your earnings over $4,768. The exact "bend points" at which different percentages apply changes year to year to keep place with inflation.

Other Factors

If you earn above a certain level -- $113,700 in 2013 -- you don't pay Social Security tax on the excess. Logically enough, your extra earnings don't boost your benefits: Making $200,000 in 2013 won't get you a better deal from the SSA than $113,700. If you apply for benefits before you reach full retirement age, the SSA reduces your PIA; if you wait until after retirement age to apply, you get slightly more.

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