Social Security is a government program that provides financial assistance to retired workers, disabled individuals, and their dependents. The amount of benefits that a person receives is based on their earnings history and the number of years they have worked.
To calculate your Social Security benefits, the Social Security Administration (SSA) will consider your earnings over the 35 years in which you earned the most. They will then index your earnings to account for inflation and apply a formula to determine your primary insurance amount (PIA). Your PIA is the amount of benefits that you would receive if you started collecting Social Security at your full retirement age (FRA).
The SSA will also consider your age and the number of years that you have worked when determining your benefits. If you start collecting Social Security before your FRA, your benefits will be reduced. If you start collecting Social Security after your FRA, your benefits will be increased.
how is social security calculated
Here are 8 important points about how Social Security is calculated:
- Based on earnings history
- 35 years of highest earnings
- Earnings indexed for inflation
- Primary insurance amount (PIA)
- Full retirement age (FRA)
- Reduced benefits before FRA
- Increased benefits after FRA
- Dependent benefits also available
By understanding how Social Security is calculated, you can plan for your retirement and make informed decisions about when to start collecting benefits.
Based on earnings history
Your Social Security benefits are based on your earnings history over the 35 years in which you earned the most. This means that the more you earn, the higher your benefits will be.
- Earnings: The SSA will consider all of your earnings from work covered by Social Security, including wages, salaries, tips, and self-employment income.
- 35 years: The SSA will use the earnings from the 35 years in which you earned the most to calculate your benefits. If you have less than 35 years of earnings, the SSA will use a formula to estimate your earnings for the missing years.
- Indexing: The SSA will index your earnings to account for inflation. This means that your earnings will be adjusted upward to reflect the cost of living at the time you retire.
- Primary insurance amount (PIA): Your PIA is the amount of benefits that you would receive if you started collecting Social Security at your full retirement age (FRA). Your PIA is calculated using a formula that takes into account your indexed earnings and the number of years that you have worked.
Once the SSA has calculated your PIA, they will use it to determine your actual Social Security benefits. The amount of benefits that you receive will depend on your age and the number of years that you have worked.
35 years of highest earnings
The SSA will use your earnings from the 35 years in which you earned the most to calculate your Social Security benefits. This means that it is important to work for as many years as possible and to earn as much as you can during those years.
- Highest earnings: The SSA will use your highest earnings from each year, up to the maximum taxable amount. The maximum taxable amount is the highest amount of earnings that are subject to Social Security taxes. For 2023, the maximum taxable amount is $160,200.
- 35 years: The SSA will use the earnings from the 35 years in which you earned the most. If you have less than 35 years of earnings, the SSA will use a formula to estimate your earnings for the missing years.
- Indexing: The SSA will index your earnings to account for inflation. This means that your earnings will be adjusted upward to reflect the cost of living at the time you retire.
- Primary insurance amount (PIA): Your PIA is the amount of benefits that you would receive if you started collecting Social Security at your full retirement age (FRA). Your PIA is calculated using a formula that takes into account your indexed earnings and the number of years that you have worked.
By understanding how the SSA calculates your Social Security benefits, you can make informed decisions about your career and your retirement planning.