November 24


How Are My Social Security Benefits Calculated?

By Mac McLean

November 24, 2020

A retired legal secretary named Ida May Fuller was the first person to receive a monthly check from Social Security’s benefits program. She paid $24.75 worth of Social Security taxes when she was working and received about $23 from the program each month for 35 years.

Not everyone will see as great a return on the money they pay into the Social Security program when they retire. But, they should expect to receive about 40 percent of their current income from the program each month – which is almost half of what they’d need to live comfortably.

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Understanding how your Social Security benefits are calculated is vital because it will help you understand how much money you’ll receive from the program each month. And that should help you know how much more you’ll need to save so you can reach your retirement goals.

Sign up for a free financial planning workshop, if you’d like to learn more about how Social Security fits into your overall retirement plan. Keep scrolling down to learn more about how your Social Security benefits are calculated.

How are my Social Security benefits calculated?

The Social Security Administration pays for your retirement benefits using a 6.2 percent payroll tax collected from you and your employer. It then uses the taxable income you reported each year to determine whether you qualify for retirement benefits and how much you will receive each month.

  • Qualifying for retirement benefits – Social Security gives people one credit for every $1,410 worth of taxable income they earn. The program caps these credits at four per year. Once you’ve collected 40 credits – imagine making at least $5,640 a year for ten years – then you qualify for the program and are ready to calculate your Social Security benefits. If you haven’t earned enough credits to qualify, you can still collect retirement benefits based on your spouse’s earnings history, regardless of whether he or she is alive, dead, or the two of you have divorced. This is also something to consider if your spouse earns or has earned considerably more than you earn each year.
  • Average Indexed Monthly Earnings – Once it’s determined you’re eligible for retirement benefits, the Social Security Administration gathers information about the taxable income you reported earning every year. It raises or lowers the amount of money each year’s earnings – a process known as indexing —  based on how the average income reported earning that year compares to the average income reported the year you decide to collect your benefits. After indexing your earnings, the administration splits of the 35 years where you had the highest income and uses this data to calculate your average indexed monthly earnings.
  • Primary Insurance Amount – The administration calculates your primary insurance amount – the basic monthly payment you can expect to receive — using a second formula and two numbers called “bend points” it sets every year that mark what it considers to be high and low income brackets. For people who plan to retire in 2021, the administration calculates a person’s primary insurance amount by adding 90 percent of the first $996 of his or her AIME (the first bend point for 2021)  average indexed monthly earnings, 32 percent of their AIME between $996 and $6,002 (the second bend point for 2021) and 15 percent of their AIME over $6,002. So, If a person’s average indexed monthly income of income was $7,500 per month, which is what they’d get if they earned $90,000 a year for the past 35 years, they could expect to see a primary insurance amount of $2,768 per month. That’s $896.40 for the first $996 of their income, $1,601.90 for the amount between $996 and $6,002, and $179,80 for the amount above $6,002. Basically, low-income earners can expect to receive 75 percent of their pre-retirement income each month from Social Security’s retirement program when they retire. People in the middle can expect to receive about 40 percent of their pre-retirement income and high-income earners can expect to receive about 27 percent.
  • Retirement age – But, you only receive your primary insurance amount if you start collecting your benefits when you hit your full retirement age – which is 66 if you were born from 1943 to 1959 and 67 if you were born after 1960. You will earn less money if you claim your benefits before your full retirement age and more money if you claim them after your full retirement age. Even a couple of months can affect how your Social Security benefits are calculated and how much you can earn from the program each month.
  • Actions on Capitol Hill – The U.S. Congress can take steps at any time that will change how your Social Security benefits are calculated. First and foremost, the Social Security Administration estimates it will only pay people 78 percent of the basic benefit amount they would normally receive if the U.S. Congress doesn’t shore up the Social Security Trust Fund before 2035. There’s also a push among members of the U.S. House of Representatives and the U.S. Senate to change the formula used to calculate Social Security’s annual cost of living adjustment. Hence, it better reflects the needs of older adults.

Luckily, the Social Security Administration runs a free service on its website — — where you can check your earnings history and see an estimate showing you how much money you’d earn from the program each month if you retired today.

And if you’ve still got questions, you can sign up for a free financial planning workshop to learn more about Social Security and how it fits into your overall retirement plan.

Mac McLean

About the author

Based out of Bend, Oregon, Mac McLean is a freelance writer who covers older adults and the issues affecting their daily lives. He currently writes for this website, the AARP Bulletin, and Waste Alert. He and his wife are riding out the pandemic with their 12-year-old English Springer Spaniel mix in a 200-square-foot guest house on a 2.2-acre farm surrounded by chickens, cows, pigs, and a donkey that simply will not shut up.

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