How are Social Security Retirement Benefits Calculated?

Social Security retirement benefits are a major source of income for millions of Americans. If you've ever wondered how they calculate them, then read on.

Social Security was created in 1935 to provide retirement benefits for workers who had paid into the system over their working years. The program has since grown to cover disability insurance, survivor benefits, and other programs.

You might also wonder how much you'll get from Social Security once you retire. How does the government determine how much you'll receive each month? And how long will you live? Read on to find out.

What Are Social Security Benefits Based On?

When it comes to calculating Social Security benefits, there are several different formulas used by the federal government. These include three main methods:

A formula based on average wages during the year prior to retirement. This method is known as the "wages-only" or "average wage" method.

A formula based on the highest 35 years of earnings. This method is called the "highest 35 years" or "35/35" method.

A combination of both formulas. This is known as the "combined" or "hybrid" method.

In addition, there's another way to calculate Social Security benefits. It's called the "primary insurance amount," or PIA. This is a single number that represents the full retirement benefit you can expect at any given time. You can use this figure to compare your expected benefits with those of others.

How Does the Government Determine Your Monthly Social Security Benefit?

The government determines your monthly Social Security benefit using one of three different methods. Each method uses a different set of rules to calculate your benefit.

Wages-Only Method

This method calculates your benefit based only on your average annual earnings during the year prior to filing for benefits. For instance, let's say you retired in 2015. In 2014, you made $40,000. That means your average annual salary was $40,000.

Your benefit would then be calculated using the following equation:

$1,500 x 40,000 $60,000

This is known as the "wage-earning base."

Highest Earnings Method

If you worked for many years, you might want to consider the "highest 35 years of earnings" method. This method takes into consideration all of your earnings throughout your career.

For example, let's say you started working at age 18 and stopped working at age 62. During that time, you made $50,000.

Your Social Security benefit would be calculated using the following formula:

$1,600 x 50,000 $80,400

Combination Methods

The third method combines elements from both the Wages-Only and Highest Earning Methods. This is known as a "hybrid" calculation.

Let's say you start working at age 22 and retire at age 65. During that time, your income rises to $70,000.

You'd get a hybrid benefit of $1,800 x 70,000 $126,000.

What Is the Primary Insurance Amount?

The primary insurance amount is a single number that shows the maximum amount of money you can expect to receive each month.

It's also referred to as the "full retirement benefit."

The PIA is determined by multiplying your current age times your indexed lifetime earnings.

For example, if you're currently 60 years old, multiply 60 by your indexed lifetime earnings. Then add your age to that result.

For example, if you're 60 years old and your indexed lifetime earnings total $100,000, your PIA would equal $120,000.