Demystifying your Social Security benefit

By RUSSELL GLOOR, National Social Security advisor for the AMAC Foundation
Posted 11/18/21

Winston Churchill famously described the Soviet Union as “a riddle inside an enigma wrapped in a mystery.” That is also an apt way to describe your Social Security benefit, or so it seems …

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Demystifying your Social Security benefit

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Winston Churchill famously described the Soviet Union as “a riddle inside an enigma wrapped in a mystery.” That is also an apt way to describe your Social Security benefit, or so it seems when trying to understand how your personal Social Security benefit is computed. 

Let’s unwrap this mystery.

There are only two key things that determine what your benefit will be: the average amount of money you earned each month over your lifetime and how old you are when you claim benefits.

Well, it’s not that simple; there are some variations and special rules that apply to both, so let’s expand just a little on these two key things.

Your lifetime average monthly earnings

Social Security defines your “lifetime” as 35 years when it computes your benefit amount. If you have more than 35 years of earnings, they’ll choose the ones in which you had the highest earnings. And if you have fewer than 35 years of earnings, they will still use 35 and fill in $0 (zero) earnings enough times to make it 35. The benefit formula always uses 35 years. 

Now, it wouldn’t be fair to use actual dollar amounts from your early years to compute today’s benefit, because your benefit would be much smaller. So Social Security adjusts your earnings in each prior year for inflation—this is known as “indexing”—and that means your benefit will be computed using today’s dollar-equivalent of your prior year’s earnings.  It would be similarly unfair to compute your benefit from earnings you didn’t pay Social Security payroll tax on, so only earnings up to the payroll tax cap for each year are used. When all 35 years of your “indexed” earnings are added up, your average indexed monthly earnings (AIME) is determined. Your AIME is then subjected to a formula which arrives at your primary insurance amount (PIA). Your PIA is the benefit you get in the month you reach your full retirement age (FRA).

How old you are when you claim benefits

As mentioned above, you get your total PIA in the month you reach your full retirement age. If you claim benefits any earlier than that time, your monthly benefit amount will be permanently reduced, and if you wait beyond your FRA to claim you will get more than your PIA by earning delayed retirement credits (DRCs). DRCs can be earned up to age 70 when your maximum Social Security benefit is attained. 

To illustrate: those with an FRA of 67 who claim Social Security at age 62 will get only 70 percent of the benefit available at their full retirement age. But if they wait until 70 to claim, they will get 24 percent more than their PIA. By waiting till 70, they would get about 75 percent more than they would get by claiming at age 62. The age at which your Social Security benefit is claimed greatly affects how much your benefit will be.

There are, of course, many other Social Security rules such as how you become entitled to benefits in the first place, the age at which they become available and myriad other topics.  Answers to all your questions about Social Security are available from the AMAC Foundation’s Social Security Advisory Service, which can be reached by calling 888/750-2622 or via email at SSAdvisor@amacfoundation.org.

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