How to calculate Social Security Benefits?

In order to calculate Social Security benefits, you must first determine your primary insurance amount (PIA). The primary insurance amount or the PIA amount is very important since all benefits are based on this number.

The benefit amount for a retired worker at age 65 and for a disabled worker is equal to the primary insurance amount (PIA). The Social Security benefit amount is reduced for retirement benefits before age 65 and increased after age 65.

Benefits for spouses, children and survivors are figured as a percentage of the primary insurance amount (PIA).

Basic formula to calculate Social Security Benefits

The primary insurance amount (PIA) is based on the earnings of the worker on whose account that benefits are claimed. The basic formula to calculate Social Security benefits and PIA will be discussed here. However, in reality, the Social Security calculate social Security benefits using SSA's computers and the actual calculations are complicated.

Indexing earnings

The first step to calculate Social Security benefits is to index earnings to adjust earnings of earlier years for inflation occurring now. The worker's annual earnings for each of the past years is indexed.

How to index earnings?

First, the Social Security Administration (SSA) determines the indexing year.

For Social Security Retirement benefits, this is two years before the year the worker becomes age 62. Click here to read more about Social Security Retirement benefits.

For Social Security Disability benefits, it is two years before the onset of disability.

For Social Security Survivor benefits, it is two years before the year of death.

For example, if a worker became 62 in 2002, became disabled in 2001, or died in 2001, the indexing year would be 2000.

Then, the Social Security Administration (SSA) will determine the average annual earnings for all workers for the indexing year and each of the previous years after 1950.

Lastly, the Social Security Administration (SSA) will divide the average earnings of all workers for the indexing  year by the average earnings of all workers for each of the previous year. Then, the SSA multiplies the result for each year by the amount of the worker's earnings for that previous year but not more than the FICA maximum for that year. This results in the indexed earnings for each previous year.

Determine number of years to use to Calculate Social Security benefits

After the earnings for all years prior to the indexing year have been indexed, the Social Security Administration (SSA) then determines how many years to use to calculate Social Security Benefits.

For people who were born before 1930, subtract 1951 from the year of attainment of age 62, start of disability, or death - whichever is earliest.

For people who were born in or after 1930, add 22 to the year of birth. Subtract that number from the year of attainment of age 62, start of disability, or death.

For Social Security retirement benefits and survivor benefits, subtract 5. The resulting number is called 'computation years'.

For Social Security Disability benefits:

• if the start of disability is age 26 or younger, do not subtract anything additional.
• if the start of disability is age 27-31, subtract 1.
• if the start of disability is age 32-36, subtract 2.
• if the start of disability is age 37-41, subtract 3.
• if the start of disability is age 42-46, subtract 4.
• if the start of disability is age 47 or older, subtract 5.

The minimum number of years that can be used to calculate Social Security Disability benefits is 2.

The maximum number of years that can be used to calculate Social Security Disability benefits is 35.

Add up the total indexed earnings

The Social Security Administration (SSA) will look at the annual indexed earnings from 1951 through the year of the benefits. For Social Security Survivor benefits, the year of death can also be included. The SSA than takes the computation years with the highest indexed earnings and add up the total indexed earnings for those computation years.

The primary insurance amount is a factor of the total indexed earnings for the computation  years divided by divisor months. This figure is rounded down to the nearest dollar.