Appendix C: Computing a Retired-Worker Benefit

Overview

This section provides instructions and a worksheet for computing a retired-worker benefit for persons born in the years 1946 through 1962—that is, those who attained age 62 from 2008 through 2024. The worksheet assumes that the worker had no prior period of entitlement to disability benefits and did not work after becoming entitled to retired-worker benefits.

The worksheet describes the various steps used in computing a benefit. The steps are based on the following Social Security program goals:

• To provide a benefit based on lifetime earnings. Benefits are related to the 35 highest earnings years (the number of computation years), but only for years after 1950. If there are fewer than 35 years with earnings, then years of no earnings are included among the 35 computation years.
• To index lifetime earnings. Earnings used in the computation are not the actual covered earnings but an amount that reflects earnings increases in average wage levels for each year after the earnings were paid. This procedure is termed wage indexing. Currently, earnings are generally indexed to wage levels in the year the worker turns age 60. For example, for a person attaining age 62 in 2024, actual earnings in 1990 of $20,000 are indexed to $60,676.42, on the basis of 2022 wage levels. Earnings after age 60 are included at their actual (nominal) value.
• To replace a portion of the indexed earnings. Indexed earnings are averaged over the number of computation years to calculate the average indexed monthly earnings (AIME). A benefit formula is applied to the AIME as the first step in computing the primary insurance amount (PIA), the amount payable to a worker who retires at the full retirement age (FRA). The benefit formula is weighted to provide a higher replacement of earnings for lower-wage workers. The formula for persons aged 62 in 2024 is 90 percent of the first $1,174 of AIME; plus 32 percent of the next $5,904; plus 15 percent of the AIME over $7,078.
• To permit early retirement. Persons can retire as early as age 62, but the monthly benefit is reduced. This reduction applies to all future benefits. The reduction is calculated as ⁵⁄₉ of 1 percent for each month immediately preceding the FRA, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced ⁵⁄₁₂ of 1 percent per month. For a person aged 62 in 2024, the maximum reduction is 30 percent if the individual is entitled to benefits for all 60 months between ages 62 and 67.
• To provide for price indexing after age 62. Benefits are adjusted annually in December to reflect increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The benefit increase in 2023 was 3.2 percent. These cost-of-living adjustments are applied to the benefit for each year after the person attained age 62—even if the person was not actually receiving benefits.
• To give credit for earnings after age 61. Earnings after age 61 (which are not indexed) can be substituted for earnings in earlier years if they result in a higher benefit.
• To give credit for late retirement. Persons who initiate benefits after FRA may receive increased benefits as a result of the delayed retirement credit provision. The benefit is increased by a specified percentage for each month between FRA and age 70 a benefit is deferred. See Table 2.A20 for percentage increases.

Clarifying the Worksheet Procedure

Step 1 - Wage Indexing of Earnings

The following description and examples are provided for persons who wish to compute the index factors and indexed earnings. The indexing year is the year a person attains age 60. Beneficiaries born on January 1 are deemed to have attained age 60 on December 31 of the prior year.

The average wage for the indexing year is divided by the average wage in each prior year to obtain the factor for each prior year. For example, for a person attaining age 62 in 2024, the indexing year is 2022. The average annual wage for 2022 was $63,795.13. The average annual wage for 1990 was $21,027.98. The amount $63,795.13 divided by $21,027.98 yields a factor of 3.0338211.

The worker's actual earnings covered under Social Security in that year, up to the maximum earnings creditable, are multiplied by the indexing factor to obtain the indexed earnings (see Worksheet 1). For example, actual covered earnings of $10,000 in 1990, multiplied by 3.0338211, result in indexed earnings of $30,338.21; actual earnings of $51,300 (the maximum creditable) result in indexed earnings of $155,635.02.

Step 2 - Computing the Average Indexed Monthly Earnings (AIME)

After the earnings in each year have been indexed, they are used in computing average indexed monthly earnings. The years of highest indexed earnings corresponding to the number of computation years are selected and totaled. This total is then divided by the number of months in the computation years. The result, rounded to the nearest lower dollar, is the average indexed monthly earnings.

For example, for a person attaining age 62 in 2024, the highest 35 years of indexed earnings are used. If the sum of these earnings equals $400,000, the AIME is $952 ($400,000 divided by 420 months = $952.38, rounded to $952).

Step 3 - Computing the Primary Insurance Amount (PIA)

The PIA, the amount from which all Social Security benefits payable on a worker's earnings record are based, is computed by applying (1) a formula to the AIME and (2) cost-of-living adjustments (COLAs) to the formula's result. Amounts are rounded to the nearest lower 10 cents at each computation step.

The PIA formula consists of three AIME brackets, to each of which a given percentage applies. The dollar amounts defining the brackets are called bend points, and the bend points are different for each calendar year of attainment of age 62. The percentages—90 percent for the first bracket, 32 percent for the second bracket, and 15 percent for the third bracket—are consistent from year to year.

For retired workers who attained age 62 in 2024, the bend points are $1,174 and $7,078. Thus the formula is 90 percent of the first $1,174 of AIME; plus 32 percent of the next $5,904 of AIME; plus 15 percent of AIME above $7,078. The following examples illustrate the computations for workers with different AIME amounts.

Example 1 - AIME of $700

Result is $630

Based on: 90 percent of $700

Example 2 - AIME of $3,000

Result is $1,640.92, rounded to $1,640.90

Based on: 90 percent of $1,174 ($1,056.60); plus
      32 percent of $1,826 ($584.32)

Example 3 - AIME of $8,000

Result is $3,084.18, rounded to $3,084.10

Based on: 90 percent of $1,174 ($1,056.60); plus
      32 percent of $5,904 ($1,889.28); plus
      15 percent of $922 ($138.30)

The above calculations are applicable to workers who attain age 62 in 2024. For workers who attained age 62 in prior years, the bend points are different, and the result of the computation must be increased to reflect COLAs between the year of attainment of age 62 and 2024. Worksheet 2 shows bend points and COLA factors for 2009 through 2024.

For example, a worker who attained age 62 in 2021 would receive COLAs for the years 2021–2023. The adjustments are cumulative, with each step rounded to the next lower dime. Continuing from Example 2 above, the COLA computations would be:

2021: $1,640.90 multiplied by 1.059 = $1,737.71, rounded to $1,737.70

2022: $1,737.70 multiplied by 1.087 = $1,888.88, rounded to $1,888.80

2023: $1,888.80 multiplied by 1.032 = $1,949.24, rounded to $1,949.20

$1,949.20 would be the PIA effective December 2023.

Step 4 - Computation of the Monthly Benefit

The PIA is payable to a worker who claims at the full retirement age (FRA). In 2000, workers reaching age 62 were the first to be affected by incremental increases in the FRA—from age 65 for workers born before 1938 to age 67 for workers born 1960 and later.

Early retirement reduces benefits:

Workers can retire as early as age 62, but the monthly benefit is reduced. The reduction is calculated as ⁵⁄₉ of 1 percent for each month immediately preceding the FRA, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced ⁵⁄₁₂ of 1 percent per month. Workers attaining age 62 in 2024 have their benefits computed based on the FRA of 67. See Table 2.A17.1 to determine the FRA based on the year of birth as well as the benefit reduction factors. For individuals electing benefits at age 62 in 2024, the maximum reduction is 30 percent.

For example, in 2024 a worker with a PIA of $1,640.90 would receive $1,148 at age 62. The PIA is reduced by $492.27, reflecting a reduction rate of ⁵⁄₉ of 1 percent for each of the first 36 months and a reduction rate of ⁵⁄₁₂ of 1 percent for each of the additional 24 months for a total reduction of 30 percent. After reducing the PIA by $492.27, the result ($1,148.63) is rounded to the next lower dollar. This is the monthly benefit amount.

Delayed retirement increases benefits:

Delayed retirement increases the benefit amount (by a certain percentage depending on a person's date of birth) if the worker delays retirement beyond FRA. Benefit increases stop accumulating when the worker reaches age 70, even if he or she continues to delay taking benefits. Delayed-retirement increases begin to apply to benefits in January of the year following the year the worker reaches FRA. The credit given for delayed retirement is 8 percent per year (¹⁶⁄₂₄ of 1 percent monthly) for those born 1943 and later. See Table 2.A20 for percentage increases.

For example, a worker born in February 1957 reached FRA in August 2023. If the worker delayed receiving benefits until January 2024 (5 months after FRA), his or her benefit is 103.333% of the PIA. If the worker's PIA is $1,640.90, the credit for delayed claiming brings that amount to $1,695.59. That amount, rounded to the nearest lower dollar ($1,695), is the monthly benefit amount.

Deductions and other adjustments:

Depending on an individual's circumstances, the monthly benefit amount that results from these computations may be subject to adjustments. For details, see https://secure.ssa.gov/poms.nsf/lnx/0300601020.