Primary Insurance Amount and benefit calculations

All workers paying FICA (Federal Insurance Contributions Act) and SECA (Self Employed Contributions Act) taxes for forty quarters of credit (QC) or more on a specified minimum income or more are "fully insured" and eligible to retire at age 62 with reduced benefits and higher benefits at full retirement ages, FRA, of 65, 66 or 67 depending on birth date.Retirement benefits depend upon the "adjusted" average wage you or your spouse have earned in the last 35 years and your respective ages. Wages of earlier years are "adjusted" before averaging by multiplying each annual salary by an annual adjusted wage index factor, AWI, for earlier salaries.Adjusted wages for 35 years are always used to compute the 35 year "average" indexed monthly salary. Only wages lower than the "ceiling" income are considered in calculating the adjusted average wage. If the worker has fewer than 35 years of covered earnings these non-contributory years are assigned zero earnings. If there are more than 35 years of covered earnings only the highest 35 are considered. The sum of the 35 adjusted salaries (or less if worker has less than 35 years of covered income) times its inflation index, AWI divided by 420 (35 yrs x 12 months/yr) gives the 35 year covered Average Indexed Monthly salary, AIME.

To calculate your Average Indexed Monthly salary (AIME) earnings, the records of your covered salaries may be obtained from the Social Security Administration by applying for them and paying a fee ranging from $15.00 for one year's covered wages to $80.00 for 40 years of wages. The adjusted wage indexes are available at Social Security's "Benefit Calculation Examples For Workers Retiring In 2013". The data from this site can be copied and pasted directly into a spreadsheet. For earlier AWI factors see:. By erasing the example salary data in the spreadsheet and substituting your own salaries and deleting the example indexed salaries and calculating your own Indexed salary (Salary*Index = Indexed salary) you can get your indexed salaries. In the spreadsheet the adjusted salaries can easily be summed and divided by 420 to find your adjusted indexed monthly salary, AIME.

[show]Benefit Calculations

Social Security Benefits Vs. 35 year "averaged" Salary

Percent of "AIME" Salary eligible for in Social Security, PIA,

Benefits

To calculate the total benefits a retiree is eligible for the average indexed monthly salary (AIME) is then divided into three separate salary brackets which are each multiplied by a different benefit percentage for each bracket. The benefits you can receive (the so-called Primary Insurance Amount, PIA) are the sum of the salary in each bracket times the benefit percentages that apply to each bracket. The benefit percentages are set by Congress and so can easily change in the future. The "bendpoints", where the brackets change, are adjusted for inflation each year by Social Security. For example, in 2013 the first bracket runs from $1.00 to $791.00/month and is multiplied by the benefit percentage of 90%, the second salary bracket extends from $791.00 to $4781.00/month is multiplied by 32%, the third salary bracket of more than $4781.00/month is multiplied by 15%. Any higher incomes than the ceiling income are not FICA covered and are not considered in the benefits calculation or in determining the average indexed monthly salary, AIME. At full retirement age the projected retirement income amount (PIA) is the sum of these three brackets of income multiplied by the appropriate benefit percentages—90%, 32% and 15%. Unlike income tax brackets, the Social Security benefits are heavily biased towards lower salaried workers. Social Security has always been primarily a retirement, disability and spousal insurance policy for low wage workers and a very poor retirement plan for higher salaried workers who hopefully have a supplemental retirement plan unless they want to live on significantly less after retirement than they used to earn.

Full retirement age spouses and divorced spouses (married over 10 years before divorce) are entitled to the higher of 50% of the wage earners benefits or their own earned benefits. A low salary worker and his full retirement age spouse making less than or equal to $791/month with 40 quarters of employment credit and at full retirement age (65 if born before 1938, 66 if born from 1938 to 1954 and 67 if born after 1960) could retire with 135% of his indexed average salary. A full retirement age worker and his full retirement age spouse making the ceiling income or more would be eligible for 43% of the ceiling FICA salary (29% if single) and even less if making more than the ceiling income.

During working years, the low wage worker is eligible for the Earned Income Tax Credit (FICA refunds) and federal child credits and may pay little or no FICA tax or Income tax. By Congressional Budget Office (CBO) calculations the lowest income quintile (0-20%) and second quintile (21-40%) of households in the U.S. pay an average income tax of -9.3% and -2.6% and Social Security taxes of 8.3% and 7.9% respectively. By CBO calculations the household incomes in the first quintile and second quintile have an average Total Federal Tax rate of 1.0% and 3.8% respectively.[34] Higher income retirees will have to pay income taxes on 85% of their Social Security benefits and 100% on all other retirement benefits they may have.

All workers paying FICA and SECA taxes for forty quarters of credit (QC) or more on a specified minimum income is "fully insured" and eligible to retire at age 62 with reduced benefits. In general the Social Security Administration tries to limit the projected life time benefits to the same amounts of retirement income the recipient would receive if retiring at full retirement age. If a recipient retires earlier he/she draws a lower Social Security benefit income for a longer prospective lifetime after retirement. The basic correction of benefits are age 62 retirees can only draw 75% of what they would draw at full retirement age with higher percentages at different ages more than 62 and less than full retirement age.

Similar computations based on career average adjusted earnings and age of recipient determine disability and survivor benefits. Federal, state and local employees who have elected (when they could) NOT to pay FICA taxes are eligible for a reduced FICA benefits and full Medicare coverage if they have more than forty quarters of qualifying Social Security covered work. To minimize the Social Security payments to those who have not contributed to FICA for 35+ years and are eligible for federal, state and local benefits, which are usually much more generous, Congress passed the Windfall Elimination Provision, WEP.The WEP provision will not eliminate all Social Security or Medicare eligibility if the worker has 40 quarters of qualifying income, but calculates the benefit payments by reducing the 90% multiplier in the first salary bracket to 40-85% depending on age etc. The WEP provision rarely causes hardship since by and large the people affected are reasonably well off because by definition they also receive government pensions from noncovered work.

For those few cases where workers with very low earnings over a long working lifetime that were too low to receive full retirement credits and the recipients would receive a very small Social Security retirement benefit a "special minimum benefit" (special minimum PIA) provides a "minimum" of $804 per month in Social Security benefits in 2013. To be eligible the recipient along with their auxiliaries and survivors must have very low assets and not be eligible for other retirement system benefits. About 75,000 people in 2013 receive this benefit.

The benefits someone is eligible for are potentially so complicated that potential retirees should consult the Social Security Administration directly for advice. Many questions are addressed and at least partially answered on many online publications and online calculators.