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Social Security benefits are typically computed using “average indexed monthly earnings.” This average summarizes up to 35 years of a worker’s earnings. We apply a formula to this average to compute the primary insurance amount (PIA). The PIA is the basis for the benefits that are paid to an individual. The formula used to compute the PIA, called the PIA formula, reflects changes in general wage levels, as measured by the national average wage index.

Average Indexed Monthly Earnings (AIME)

When we compute a worker’s benefit, we first adjust or index his or her earnings to reflect the change in general wage levels that occurred during the worker’s years of employment. Such indexation ensures that a worker’s future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime. Up to 35 years of earnings are needed to compute the average indexed monthly earnings. After we determine the number of years, we choose those years with the highest indexed earnings, sum such indexed earnings, and divide the total amount by the total number of months in those years. We then round the resulting average amount down to the next lower dollar amount. The result is the average indexed monthly earnings.

An insured worker becomes eligible for retirement benefits when he or she reaches age 62. If 2010 were the year of eligibility, we would divide the national average wage index for 2008 (41,334.97) by the national average wage index for each year prior to 2008 in which the worker had earnings and multiply each such ratio by the worker’s earnings. This would give the indexed earnings for each year prior to 2008. We would consider any earnings in or after 2008 at face value, without indexing. Then we would compute the average indexed monthly earnings and use this average amount in computing the worker’s primary insurance amount for 2010.

Primary Insurance Amounts

The PIA is the sum of three separate percentages of portions of the average indexed monthly earnings. The “bend points” of the PIA formula are the dollar amounts that govern the portions of the average indexed monthly earnings. The bend points in the year 2010 PIA formula, $761 and $4,586, apply for workers becoming eligible in 2010. For example, a person who had maximum-taxable earnings in each year since age 22, and who retires at age 62 in 2010, would receive a reduced benefit based on a PIA of $2,413.30. The first COLA this individual could receive is the one effective for December 2010.

PIA formula

For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2010, or who dies in 2010 before becoming eligible for benefits, his/her PIA will be the sum of:

• (a) 90 percent of the first $761 of his/her average indexed monthly earnings, plus
• (b) 32 percent of his/her average indexed monthly earnings over $761 and through $4,586, plus
• (c) 15 percent of his/her average indexed monthly earnings over $4,586.

We round this amount to the next lower multiple of $.10 if it is not already a multiple of $.10.

Monthly Benefit Amounts

Monthly retirement benefits derived from the PIA may be higher or lower than the PIA. Reduced benefits are paid if one retires before his/her normal retirement age. A person cannot collect retirement benefits before age 62. In the case of a person retiring at exactly age 62 in 2010, the benefit will be 25 percent less than the person’s PIA. Benefits can be higher than the PIA if one retires after the normal retirement age. The credit given for delayed retirement will gradually reach 8 percent per year for those born after 1942. No delayed retirement credit is given after age 69. (See Separate Table.)