How is Social Security calculated?
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Key takeaways
Social Security benefits are calculated based on your Average Indexed Monthly Earnings (AIME), which is the average of your 35 highest-earning years adjusted for inflation.
Your Primary Insurance Amount (PIA) is the monthly benefit you'd receive at your full retirement age (FRA).
Claiming benefits before your FRA reduces them while delaying increases them.
Social Security benefits play a key role in retirement income for many Americans. Knowing how Social Security is calculated is essential for smart financial planning and a secure retirement.
In this article, we’ll break down the Social Security benefit calculation process and highlight the main factors that affect how much you'll receive.
From understanding your Average Indexed Monthly Earnings (AIME) to the effects of your claiming age and work history, this guide will help you navigate the ins and outs of Social Security.
Determining your Average Indexed Monthly Earnings
The foundation of how your Social Security benefit is calculated lies in your AIME. This figure represents your average earnings over your 35 highest-earning years adjusted for inflation.¹
The Social Security Administration (SSA) considers your entire working history, but only your highest 35 years of earnings are factored into the calculation. This ensures that your benefit reflects your strongest earning periods.
To accurately compare earnings across different years, the SSA adjusts your past earnings to reflect changes in the cost of living. This process, called indexing, ensures that your benefits reflect the true value of your past earnings in today's dollars.
The wage base limit
Each year, the SSA sets a maximum amount of earnings subject to Social Security taxes. This is known as the “maximum taxable earnings.” For 2024, this limit is $168,600.² Only earnings up to this limit are considered when calculating your AIME.
Calculating your primary insurance amount (PIA)
Once your AIME is determined, the next step in understanding how your Social Security payment is calculated involves figuring out your PIA. This figure represents the monthly benefit you would receive if you began collecting Social Security at your full retirement age (FRA).
The PIA formula
The PIA is not simply a direct percentage of your AIME. Instead, a specific formula is used that applies different percentages to different portions of your AIME. This formula incorporates "bend points," which are income thresholds that determine the percentage applied to each segment of your earnings.
For individuals reaching age 62 in 2025, the bend points are:³
- $1,226: 90% of AIME up to this amount is included in your PIA.
- $7,391: 32% of AIME between $1,226 and $7,391 is included.
- Above $7,391: 15% of AIME above $7,391 is included.
Factors affecting your benefit amount
Your PIA gives you a starting point, but several factors can affect the actual amount you’ll receive in Social Security benefits. Understanding these factors is crucial for making informed decisions about when to claim and how to maximize your benefits.
Claiming age
The age you start to claim your benefits is one of the most significant factors affecting your monthly benefit.
- Claiming before full retirement age (FRA): If you start receiving benefits before your FRA (which ranges from 66 to 67 depending on your birth year), your benefits will be permanently reduced. This reduction is calculated on a monthly basis, with a larger reduction for each month earlier than your FRA you claim.
- Claiming at full retirement age: You are entitled to your full primary insurance amount if you claim at your FRA.
- Claiming after full retirement age: For each month you delay claiming beyond your FRA, up to age 70, your benefit increases. These delayed retirement credits can help maximize your Social Security benefits.
Work history
Your work history plays a role in determining your benefit amount in two ways:
- Years of earnings: As mentioned earlier, your AIME is based on your 35 highest-earning years. If you have fewer than 35 years of substantial earnings, years with zero earnings will be factored into the calculation, lowering your AIME and, ultimately, your benefit.
- Earnings while receiving benefits: If you claim benefits before your FRA and continue to work, your benefits may be temporarily reduced if your earnings exceed certain limits.
Spousal benefits
If you are married, your spouse may be eligible for benefits based on your work record. Spousal benefits can be up to 50% of your PIA at your FRA. However, if your spouse also worked, they will receive the higher of their own benefit or the spousal benefit.
Estimating your benefits
While understanding the factors that influence your Social Security benefit is essential, you likely may be asking, "How much Social Security will I get?" Fortunately, the Social Security Administration provides resources to help you estimate your future benefits.
Create a "my Social Security" account
The most accurate way to estimate your benefits is to create a personal account on the SSA website.⁴ This secure online portal allows you to:
- Access your Social Security statement: This statement provides a personalized estimate of your retirement, disability, and survivor benefits based on your actual earnings record.
- Use the retirement estimator: This tool allows you to compare benefit estimates for different claiming ages, helping you understand the impact of your decision.
- Explore other calculators: The SSA website offers various calculators to address specific situations, such as Government Pension Offset (GPO) calculators.
Utilize the SSA's quick calculator
If you don't have a "my Social Security" account, you can use the SSA's Quick Calculator.⁵
This tool provides a rough estimate of your benefits based on your age and estimated earnings.
Keep in mind that this estimate is less accurate than the one provided through your personal account as it doesn't access your actual earnings record.
FAQ
How much can you earn while on Social Security?
It depends on your age and whether you've reached your full retirement age.
- Before full retirement age: In 2024, if you're under FRA for the entire year, you can earn up to $22,320 without any reduction in benefits. For every $2 earned above this limit, $1 will be deducted from your benefits.
- Reaching full retirement age: If you reach FRA in 2024, the limit is higher for the months before you reach FRA. You can earn up to $59,520, and for every $3 earned above this limit, $1 will be deducted.
- At or after full retirement age: Once you reach your FRA, there is no limit on how much you can earn while receiving benefits.
How much Social Security will I get at age 65?
The amount you receive at age 65 depends on your full retirement age and your Primary Insurance Amount.
For example, let's say your full retirement age is 67 and your PIA is $2,000. If you choose to start receiving benefits at age 65, your benefits will be reduced because you are claiming them early.
Since you're claiming two years early, your benefit might be reduced by approximately 13.3% per year or a total of about 26.6%. This means your monthly benefit at age 65 would be roughly $1,468.
To get a personalized estimate of your benefit at age 65, it's best to create a "my Social Security" account on the SSA website and use their Retirement Estimator tool.
Have more questions about retirement? Head to our retirement guides now to learn more!
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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