Social Security benefits are based on your highest 35 years of adjusted earnings. These earnings are then adjusted for inflation using the national wage index. The U.S. Social Security Administration (SSA) provides a worksheet on their website (www.ssa.gov) that details the adjustment factors.

Key Terms:

  • Nominal Earnings: The actual amount you earned each year, without any adjustments.

  • Indexing Factor: The national wage index adjustment applied to each year’s earnings to account for inflation.

  • Indexed Earnings: Your nominal earnings after adjusting for inflation using the indexing factor.

Once all of your earnings are adjusted for inflation, the SSA identifies your highest 35 years of indexed earnings. These years are then averaged to determine your Average Indexed Monthly Earnings (AIME).

How to Calculate AIME:

  1. Identify the highest 35 years of indexed earnings: Select your top 35 years of indexed earnings.

  2. Average those years: Add them together and divide by 420 (12 months x 35 years).

  3. Divide by 12 to get the AIME: For example, if your AIME is $5,000, this is the figure used in the next steps of benefit calculation.

How Benefits Are Calculated:

The Social Security formula for computing your Primary Insurance Amount (PIA) is based on three “bend points” which change annually. For 2025, the bend points are:

  • Bend Point (a): 90% of the first $1,226 of your AIME

  • Bend Point (b): 32% of your AIME between $1,226 and $7,391

  • Bend Point (c): 15% of your AIME over $7,391

For a worker with an AIME of $5,000, only the first two brackets (a) and (b) will apply, as their AIME is below $7,391. Here’s how the PIA is calculated:

  1. Bend Point (a): 90% of the first $1,226 = $1,103

  2. Bend Point (b): 32% of the amount between $1,226 and $5,000 (which is $3,774) = $1,207

Adding these two amounts together gives the PIA:

  • $1,103 (from Bend Point a)

  • $1,207 (from Bend Point b)

Total PIA: $2,310

This is the worker’s PIA at full retirement age.

Key Points to Remember:

  1. Early Retirement: If you claim benefits before reaching your full retirement age (FRA), your benefit will be reduced by approximately 6% per year. The exact reduction depends on how many months you file early.

  2. Delayed Retirement: If you delay claiming beyond your FRA, your benefit will increase by 8% per year due to the Delayed Retirement Credit (DRC). This can significantly boost your monthly benefit.

  3. Maximum PIA: The maximum benefit for 2025 is $5,108 at full retirement age.