How the Social Security Formula Calculates Benefit Amounts

When it comes to future planning, if you’re counting on Social Security, how much money you’ll receive is vital info. But where does your benefit number come from, and how can you find that information? The answer is that the Social Security Administration (SSA) uses what is known as the “Social Security formula” to calculate benefits. This formula is applicable whether you’re applying for disability or retirement benefits. Mathematically, it can be a tad confusing, but we’re here to help you figure this out.

Read on to understand how the Social Security Administration (SSA) determines the amount on your check — so you can doublecheck. Because it’s important to make sure you’re getting the benefits you deserve.

What Does the SSA Consider When Calculating Benefits?

When submitting paperwork for either a disability or retirement claim, the SSA will start by looking at your work history. You must have enough years of employment/work credits on record to qualify. This is because the SSA bases your social security benefits on your lifetime “covered earnings.” In other words, they want to know you’ve made enough tax payments into the system to be eligible.

If it seems you meet the work requirements, then the SSA will continue calculations using the social security formula. In a nutshell, the formula is a three-step process, though there are other factors that may come into play.

Basically, the SSA will calculate your benefits by:

1. Adjusting or “indexing” your earnings. First the SSA determines your average monthly income over your career — which it adjusts for historical changes in U.S. wages.
2. Determining your Average Indexed Monthly Income (AIME). The SSA then calculates your AIME during the 35 years in which you show the most income from covered earnings. Note, the SSA will only count income up to the maximum taxable earnings. This means the cap on how much of your wages are subject to Social Security taxation. In 2024 the tax max is $168,600.
3. Plugging the AIME into the applicable year’s Social Security formula. The SSA applies a formula to these earnings to determine an individual’s Primary Insurance Amount (PIA). This is also known as your “full retirement benefit.” That’s the amount you will get if you wait to retire at your full retirement age.

What is this “Secret” Social Security Formula?

To ultimately get to a person’s PIA, the Social Security formula runs the individual’s AIME through another three steps. While the percentages in this formula stay the same, the dollar amounts change annually.

The formula to achieve a person’s PIA number in 2023 is the sum of the following:

• 90% of the first $960 of the AIME.
• Plus, 32% of any amount of the AIME over $960 up to $5,785.
• Plus, 15% of the AIME for anything over $5,785.

Those three numbers added together become a person’s PIA number, meaning the total potential benefit amount at full retirement age. To get the “final” PIA, round that sum to the nearest whole dollar. In other words, there are no cents in benefits.

If you’re applying for benefits starting in a different year, you must adjust the dollar numbers in the above calculation. Those variable dollar amounts are called “bend points.” You can check the numbers for earlier years for which you’re applying in the SSA’s Benefit Formula Bend Point chart. The SSA will keep adding future years after 2024 using the annual Average Wage Index (AWI) to figure subsequent calculations.

What Other Factors Plug into This Social Security Formula?

For retirement benefits, the SSA uses an individual’s 35 highest-earning years to calculate their AIME and PIA.

However, the number of years may be less if determining a Social Security Disability Insurance (SSDI) claim. This is because the disability may occur prior to full retirement age. The number of years of income used to calculate benefits depends on the age the person becomes incapable of working.

The exact number of years the SSA uses for determining benefits for SSDI claims becomes yet another calculation. It’s complicated, but basically, the SSA will count the years between when a person turns 22 to when disability strikes. They call these “elapsed years.” It then throws out 1-5 of the person’s lowest-earning elapsed years (depending on the number of years of work). The resulting number is how many of the highest-earning years will go into that person’s PIA Social Security formula.

People working to full retirement age have the potential to show more years of higher covered earnings. As a result, they’re likely to have bigger average benefit payments than people who qualify for SSDI or retire early. In February 2023, the average monthly Social Security retirement payment was about $1,694 whereas SSDI was $1,341. But again, your payout might be higher or lower depending on your situation and work record.

Also consider that the Social Security formula does not factor into Supplemental Security Income (SSI) claims. The SSA bases SSI determinations purely on financial need and not a person’s employment history.

How Else Might I Find Out My Potential Benefits?

If math isn’t your thing and this social security formula feels confusing, there are a few other options.

To begin with, the SSA offers an online benefits calculator where you can get a payment estimate. However, fair warning this is going to take you some work since you must manually enter all your earnings. That means finding and recording every year that shows up on your Social Security statement.

A slightly easier option is to create a my Social Security account online through the SSA’s secure portal. By setting up an account, your work record will show up automatically since it links to your Social Security number. You will also be able to get an estimate of your future retirement benefits. Plus, there’s an option to play with different retirement age scenarios (early/late retirement) and see how that affects benefits.

If you are contemplating applying for SSDI, however, you may wish to consult with a Social Security disability lawyer. An attorney is also a good idea if you’re trying to decide between taking retirement benefits or filing for disability. Both these scenarios — and many others — add layers to the Social Security formula (as if it weren’t already confusing enough).

The best way to ensure you get the correct benefit amount is to get some help negotiating the system. Especially since represented Social Security applicants are 3x more likely to have a positive outcome the first time they apply. Our network of Social Security disability lawyers will make sure you are covered for your claim.