How Are Social Security Benefits Calculated?

There are two key things to know about how benefits are calculated:

1. First, how much you get out of Social Security depends on how much you put in. Your monthly benefit is calculated as a percentage of your average lifetime earnings.


2. Second, the Social Security benefit formula is progressive. This means that - as a percentage of pre-retirement income - the monthly benefit that a low-income earner receives will be more generous than that of a high-income earner. Or, to put it another way, a high earner’s monthly benefit will fall far short of their pre-retirement paycheck, while a low earner can expect a monthly benefit amount that’s closer to the paycheck they received while they were working.

That’s the broad overview. Here’s a detailed breakdown of the calculations involved:

When you retire, the Social Security Administration tallies up what you made during your highest 35 years of earnings. It then adjusts that amount for wage inflation and calculates your average monthly earnings. This number is called your AIME, or average indexed monthly earnings. ss1

To determine the amount of your monthly benefit, the Social Security Administration takes your AIME and uses it to calculate your Primary Insurance Amount, or PIA. The PIA formula works like this:

AIME Levels & Benefit Percentages

Confused? Let’s take a look at the calculation in action.

Let’s say you were a high earner who retired in 2020 and your AIME was $8,000. Using the PIA formula ss2, your monthly Social Security benefit would be:

AIME Example

In other words, your monthly Social Security benefit at the full retirement age would begin at $2,741.25 (and then get indexed to price inflation every year).

What if I retire early?

If you retire at the full retirement age (which will be 67 starting in 2025), your PIA is the benefit that you’ll actually receive in your bank account each month.  If you retire earlier than that, your PIA will be adjusted downward so that your expected lifetime benefits will be the same as if you had retired at the full retirement age.

For more information:

1. SSA’s “quick calculator” allows you to estimate your future benefits.


2. SSA also provides two examples: one person who retires early at the age of 62 and another who retires at the full retirement age.

3. With SSA’s retirement calculator you can use your actual earnings history to estimate your monthly benefit. To use the calculator, you need to create an account with the Social Security Administration. You should do so as soon as you start working full-time, since the site updates regularly with new projections for your Social Security benefits as you pay taxes.

ss1 If you worked for less than 35 years, the SSA simply adds years with zero earnings and then performs the same calculation.

ss2 The “bend points” at $960 and $5,785 are increased every year. These numbers are for 2020 retirees. A full history of bend points is here.

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