How Are Social Security Benefits Calculated?


Quick Answer

As of November 2014, the Social Security Administration calculates benefits by using a person's highest-earning annual incomes over 35 years, and then the agency applies those figures to a formula that creates a beneficiary's primary insurance amount. For instance, someone who earned $3,492,021 over 35 years had an average monthly income of $8,314, versus someone who earned $1,572,877 over 35 years and had $3,744 per month.

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How Are Social Security Benefits Calculated?
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Full Answer

Following the aforementioned example of 35-year incomes, the beneficiary with $8,314 of average monthly income may retire with a monthly benefit of $2,449.41. The lower-earning person receives a benefit of $1,677.16.

The SSA calculates a greater percentage of lower-wage earners' incomes for a retirement benefit than it does for higher-wage earners to compensate for disparate lifetime wages among all workers. People who earn more than a certain amount in annual income do not include that figure in the lifetime wages earned. The SSA marks zero annual income for years when people did not earn wages over the last 35 years of their working lives.

There are several ways to increase monthly retirement benefits. People should work at least 35 years and increase income over that span. A delay in retirement means increased benefits up to age 70, as of November 2014. Every year worked after retirement age delineates an 8 percent payment increase per year, up to age 70, if a worker does not claim the Social Security benefit.

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