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School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor--------------------Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

How Social Security Benefits Are Computed: In Brief

Noah P. Meyerson, Analyst in Income Security

May 12, 2014

http://www.fas.org/sgp/crs/misc/R43542.pdf

[full-text, 10 pages]

 

Summary

With $812 billion in benefit outlays in 2013, Social Security is the largest program in the federal

budget. It provides monthly cash benefits to retired and disabled workers and their family

members as well as to the family members of deceased workers. Currently, there are about 58

million beneficiaries. Under current law, Social Security’s revenues are projected to be

insufficient to pay full scheduled benefits after 2033.

 

Monthly benefit amounts are determined by federal law. Social Security is an issue of ongoing

interest both because of its role in supporting a large portion of the population and because of its

long-term financial imbalance, and policy makers have considered numerous proposals to change

its benefit computation rules.

 

The Social Security benefits that are paid to worker beneficiaries and to workers’ dependents and

survivors are based on workers’ past earnings. The computation process involves three main

steps:

 

• First, a summarized measure of lifetime earnings is computed. That measure is

called the average indexed monthly earnings (AIME).

 

• Second, a benefit formula is applied to the AIME to compute the primary

insurance amount (PIA). The benefit formula is progressive. As a result, workers

with higher AIMEs receive higher Social Security benefits, but the benefits

received by people with lower earnings replace a larger share of past earnings.

 

• Third, an adjustment may be made based on the age at which a beneficiary

chooses to begin receiving payments. For retired workers who claim benefits at

the full retirement age (FRA), which is currently 66, and for disabled workers,

the monthly benefit equals the PIA. Retired workers who claim earlier receive

lower monthly benefits, and those who claim later receive higher benefits.

 

Benefits for eligible dependents and survivors are based on the worker’s PIA. For example, a

dependent spouse receives a benefit equal to 50% of the worker’s PIA, and a widow(er) receives

a benefit equal to 100% of the worker’s PIA. Dependent benefits may also be adjusted based on

the age at which they are claimed.

 

Contents

Introduction ...................................................................................................................................... 1

Eligibility ......................................................................................................................................... 1

Average Indexed Monthly Earnings ................................................................................................ 2

Wage Indexing ........................................................................................................................... 2

Averaging Indexed Earnings ..................................................................................................... 2

Primary Insurance Amount .............................................................................................................. 3

Wage Indexing Results in Stable Replacement Rates ...................................................................... 4

Cost-of-Living Adjustment .............................................................................................................. 4

How Timing of Benefit Claim Affects Benefit Levels .................................................................... 5

Full Retirement Age .................................................................................................................. 5

Adjustments for Early and Late Benefit Claim ......................................................................... 5

Dependent Benefits .......................................................................................................................... 6

Other Adjustments to Benefits ......................................................................................................... 7

 

Figures

Figure 1. Computation of a Worker’s Primary Insurance Amount (PIA) in 2014 ........................... 4

Figure 2. Monthly Retirement Benefit by Claim Age ...................................................................... 6

 

Tables

Table 1. Computation of a Worker’s Primary Insurance Amount (PIA) in 2014 Based on an Illustrative AIME of $5,000 ................................. 3

Table 2. Full Retirement Age (FRA) by Year of Birth ..................................................................... 5

 

Contacts

Author Contact Information............................................................................................................. 7

 

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