Annual Statistical Supplement, 2010

Appendix D: Computing a Retired-Worker Benefit

Overview

This section provides instructions and a worksheet for computing a retired-worker benefit for persons born in the years 1935 through 1948. The worksheet assumes that the worker had no prior period of entitlement to disability benefits and did not work after becoming entitled to retired-worker benefits.

The worksheet describes the various steps used in computing a benefit. The steps are based on the following Social Security program goals:

Clarifying the Worksheet Procedure

Step 1 - Determining the Number of Computation Years

For workers born in the years 1935 through 1948, the number of computation years is 35.

Step 2 - Wage Indexing of Earnings

The following description and examples are provided for persons who wish to compute the index factors and indexed earnings. The indexing year is the year a person attains age 60. Beneficiaries born on January 1 are deemed to have attained age 60 on December 31 of the prior year.

The average wage for the indexing year is divided by the average wage in each prior year to obtain the factor for each prior year. For example, for a person attaining age 62 in 2010, the indexing year is 2008. The average annual wage for 2008 was $41,334.97. The average annual wage for 1990 was $21,027.98. The amount $41,334.97 divided by $21,027.98 yields a factor of 1.9657128.

The worker's actual earnings covered under Social Security in that year, up to the maximum earnings creditable, are multiplied by the indexing factor to obtain the indexed earnings (see Worksheet 1). For example, actual covered earnings of $10,000 in 1990, multiplied by 1.9657128, result in indexed earnings of $19,657.13; actual earnings of $51,300 (the maximum creditable) result in indexed earnings of $100,841.07.

Step 3 - Computing the Average Indexed Monthly Earnings (AIME)

After the earnings in each year have been indexed, they are used in computing average indexed monthly earnings. The years of highest indexed earnings corresponding to the number of computation years are selected and totaled. This total is then divided by the number of months in the computation years. The result, rounded to the nearest lower dollar, is the average indexed monthly earnings.

For example, for a person attaining age 62 in 2010, the highest 35 years of indexed earnings are used. If the sum of these earnings equals $400,000, the AIME is $952 ($400,000 divided by 420 months = $952.38, rounded to $952).

Step 4 - Computing the Primary Insurance Amount (PIA)

The PIA, the amount from which all Social Security benefits payable on a worker's earnings record are based, is computed by applying a formula to the AIME. The formula consists of brackets in which three percentages are applied to amounts of AIME. The dollar amounts defining the brackets are called bend points, and the bend points are different for each calendar year of attainment of age 62. The PIA is rounded to the nearest lower 10 cents.

For retired workers who attained age 62 in 2010, the bend points are $761 and $4,586. Thus the formula is 90 percent of the first $761 of AIME; plus 32 percent of the next $3,825 of AIME; plus 15 percent of AIME above $4,586. The following are examples of PIA computations for such workers with different AIME amounts.

Example 1 - AIME of $700
PIA is $630
Based on: 90 percent of $700

Example 2 - AIME of $1,500
PIA is $921.38 rounded to $921.30
Based on: 90 percent of $761 ($684.90); plus
32 percent of $739 ($236.48)

Example 3 - AIME of $5,000
PIA is $1,971.00
Based on: 90 percent of $761 ($684.90); plus
32 percent of $3,825 ($1,224.00); plus
15 percent of $414 ($62.10)

The above calculations are applicable to workers who attain age 62 in 2010. For workers who attained age 62 in prior years, the bend points will be different, and the PIA must be increased to reflect cost-of-living adjustments between the year of attainment of age 62 and 2010. Worksheet 2 shows cost-of-living increase factors for 1979 through 2009. After the PIA is calculated for the year of attainment of age 62, cost-of-living increases are applied for each year through 2009. The result is the current 2010 PIA.

For example, a worker who attained age 62 in 2007 would receive cost-of-living adjustments for the years 2007–2009. The adjustments are cumulative, with each step rounded to the next lower dime. If the PIA at age 62 was $700, the cost-of-living adjustments would be:

2007: $700 multiplied by 1.023 = $716.10
2008: $716.10 multiplied by 1.058 = $757.60
2009: $757.60 multiplied by 1.000 = $757.60
$757.60 would be the PIA effective December 2009.

Step 5 - Computation of the Monthly Benefit

The full PIA is payable to a worker who retires at the full retirement age (FRA). In 2000, incremental increases in the FRA—from age 65 for workers born 1937 and earlier to age 67 for workers born 1960 and later—began to be phased in.

Early retirement reduces benefits:

Workers can still retire as early as age 62, but the monthly benefit is reduced by 5/9 of 1 percent for each of the first 36 months of entitlement immediately preceding the FRA. If the number of months preceding FRA exceeds 36, then the benefit is further reduced 5/12 of 1 percent for each of up to 24 earlier months. Workers attaining age 62 in 2010 have their benefits computed based on the FRA of 66. See Table 2.A17.1 to determine the FRA based on the year of birth as well as the reduction factors. For individuals electing benefits at exactly age 62 in 2010, the maximum reduction is 25 percent.

For example, in 2010 a worker with a PIA of $700 would receive $525 at age 62. The PIA is reduced by $175.00, reflecting a reduction rate of 5/9 of 1 percent for each of the first 36 months and a reduction rate of 5/12 of 1 percent for each of the additional 12 months for a total reduction of 25 percent. After reduction of the PIA by $175.00, the benefit amount is rounded down to the nearest lower dollar.

Delayed retirement increases benefits:

Delayed retirement increases the benefit amount (by a certain percentage depending on a person's date of birth) if the worker delays retirement beyond FRA. Benefit increases stop accumulating when the worker reaches age 70, even if he or she continues to delay taking benefits. Delayed retirement increases begin to apply to benefits in January of the year following the year the worker reaches FRA. The credit given for delayed retirement will gradually reach 8 percent per year (16/24 of 1 percent monthly) for those born 1943 and later. See Table 2.A20 for percentage increases.

For example, a worker born June 1944 will reach FRA in June 2010. If the worker delays receiving benefits until November 2010 (5 months after FRA), his or her benefit will be 103.33% of the PIA. If the worker's PIA is $700, his or her benefit would increase to $723.31 rounded to $723.30.

Instructions for computing a retired-worker benefit (only for workers attaining age 62 in years 1997–2010)
STEP 1.—Determining the Number of Computation Years
1 Number of Computation Years. 35
STEP 2.—Indexing of Earnings (Use Worksheet 1 for Steps 2 and 3.)
2 Enter in column 2 your earnings in each year 1951 through 2009. If none, enter "0."  
3 Column 3 contains the maximum earnings creditable under Social Security for each year.  
4 Enter in column 4 the lower amount from columns 2 or 3 for each year.  
5 Enter in column 5 the indexing factors applicable to the year you attained age 62 from Table 2.A8.
(This table contains the indexing factors for persons attaining age 62 during the period 1995–2010.)
 
6 Multiply column 4 by column 5 and enter results in column 6 in dollars and cents. These are your indexed earnings.  
STEP 3.—Computing the Average Indexed Monthly Earnings (AIME)
7 Enter the number of computation years from line 1. 35
8 Place an "X" in column 7 next to each of the 35 highest indexed earnings entries.  
9 Add all individual indexed earnings marked with an "X."  
10 Number of months in the computation period. 420
11 Divide line 9 by line 10.  
12 Round the result in line 11 to the next lower dollar. This is your average indexed monthly earnings (AIME).  
STEP 4.—Computing the Primary Insurance Amount (PIA) (Use Worksheet 2 for Step 4.)
13 Enter first bend point from Worksheet 2 based on year of attainment of age 62. (If your birthday is January 1, enter prior year.)  
14 Enter second bend point from Worksheet 2.  
15 If your AIME (obtained in line 12) is equal to or less than line 13, complete line 16, otherwise skip to line 17.  
16 Multiply line 12 by 0.9. (If you receive a pension on the basis of noncovered employment, see Table 2.A11.1.) Round to next lower dime to obtain your PIA at age 62. Continue with line 26.  
17 If your AIME (obtained in line 12) is greater than line 13 but less than or equal to line 14, complete lines 18–20, otherwise skip to line 21.  
18 Multiply line 13 by 0.9. (If you receive a pension on the basis of noncovered employment, see Table 2.A11.1.)  
19 Subtract line 13 from line 12 then multiply by 0.32.  
20 Add line 18 to line 19, and round to next lower dime to obtain your PIA at age 62. Continue with line 26.  
21 If your AIME (obtained in line 12) is greater than line 14, complete lines 22–25.  
22 Multiply line 13 by 0.9. (If you receive a pension on the basis of noncovered employment, see Table 2.A11.1.)  
23 Subtract line 13 from line 14 then multiply by 0.32.  
24 Subtract line 14 from line 12 then multiply by 0.15.  
25 Add lines 22, 23, and 24, and round to the next lower dime to obtain your PIA at age 62. Continue with line 26.  
26 If you attained age 62 in 2010, skip to line 32. Otherwise you will need to adjust your PIA to reflect cost-of-living adjustments (COLAs) from the year you attained age 62 through 2009 by using lines 27–31 and Worksheet 2.  
27 Enter year of attainment of age 62.  
28 Place an "X" corresponding to the year you attained age 62 in column 5 (Worksheet 2).  
29 Place an "X" in column 5 (Worksheet 2) next to each subsequent year through 2009.  
30 Enter your PIA at age 62 from either line 16, 20, or 25—here and in the first row of column 6 (Worksheet 2).  
31 Beginning with first year marked, multiply your PIA at age 62 by the corresponding factor (column 4), round to the next lower dime, and enter in column 6. The resulting PIA is then multiplied by the next factor and is again rounded to the next lower dime. Continue this process through 2009. Enter this last figure, which is your current PIA.  
STEP 5.—Computing the Monthly Benefit
32 Enter your current PIA from either line 16, 20, 25, or 31.  
33 Using Table 2.A17.1, determine your full retirement age and enter here.  
34 If you retired at your full retirement age, round PIA from line 32 to the next lower dollar to obtain your monthly benefit. If you retired before the full retirement age, skip to line 35. If you retired after the full retirement age, skip to line 45.  
35 If you retired before the full retirement age, enter your age at retirement in years and months, and complete lines 36–44.  
36 Subtract line 35 from line 33, and convert the result to months to determine the total number of reduction months.  
37 If line 36 is greater than 36 reduction months, subtract 36 months and enter the result here.  
38 "0.0055556" (the decimal equivalent of 5/9 of 1 percent—the monthly reduction factor for the first 36 months) has been entered. 0.0055556
39 "0.0041667" (the decimal equivalent of 5/12 of 1 percent—the monthly reduction factor for months above 36) has been entered. 0.0041667
40 Multiply line 36 (but not more than 36 months) by line 38 to obtain the percent reduction for the first 36 months.  
41 Multiply line 37 by line 39 to obtain the percent reduction for months in excess of 36.  
42 Add lines 40 and 41 to obtain the total percent reduction.  
43 Multiply line 32 by line 42 to obtain the amount of benefit reduction.  
44 Subtract line 43 from line 32, and round to the next lower dollar to obtain your monthly benefit.  
45 If you retired (or plan to retire) after the full retirement age, enter your actual (or planned) age at retirement in years and months, and complete lines 46–50. If you worked (or plan to work) after attaining age 70, enter "70 years 0 months."  
46 Subtract line 33 from line 45, and convert the result to months to determine the total number of delayed months.  
47 "0.006667" (the decimal equivalent of 16/24 of 1 percent—the monthly percentage increase for persons born 1943 or later) has been entered. 0.006667
48 Multiply line 46 by line 47 to obtain the total percent increase.  
49 Multiply line 32 by line 48 to obtain the amount of benefit increase.  
50 Add line 32 to line 49, and round to the next lower dollar to obtain your monthly benefit.  
Worksheet 1: Indexing of earnings
Year Your
earnings
Maximum
taxable
earnings
(dollars)
Lower of
columns
2 or 3
Indexing
factor
Column 4
times
column 5
Highest
indexed
earnings
1 2 3 4 5 6 7
1951   3,600        
1952   3,600        
1953   3,600        
1954   3,600        
1955   4,200        
1956   4,200        
1957   4,200        
1958   4,200        
1959   4,800        
1960   4,800        
1961   4,800        
1962   4,800        
1963   4,800        
1964   4,800        
1965   4,800        
1966   6,600        
1967   6,600        
1968   7,800        
1969   7,800        
1970   7,800        
1971   7,800        
1972   9,000        
1973   10,800        
1974   13,200        
1975   14,100        
1976   15,300        
1977   16,500        
1978   17,700        
1979   22,900        
1980   25,900        
1981   29,700        
1982   32,400        
1983   35,700        
1984   37,800        
1985   39,600        
1986   42,000        
1987   43,800        
1988   45,000        
1989   48,000        
1990   51,300        
1991   53,400        
1992   55,500        
1993   57,600        
1994   60,600        
1995   61,200        
1996   62,700        
1997   65,400        
1998   68,400        
1999   72,600        
2000   76,200        
2001   80,400        
2002   84,900        
2003   87,000        
2004   87,900        
2005   90,000        
2006   94,200        
2007   97,500        
2008   102,000        
2009   106,800        
Worksheet 2: Computing the primary insurance amount (PIA) for workers retiring after age 62
Year 1st bend point
(dollars)
2nd bend point
(dollars)
Cost-of-living
increase
(percent)
Cost-of-living
factor
Years
aged 62
or older
PIA
(dollars)
  1 2 3 4 5 6
Age 62 PIA:  
1979 180 1,085 9.9 1.099    
1980 194 1,171 14.3 1.143    
1981 211 1,274 11.2 1.112    
1982 230 1,388 7.4 1.074    
1983 254 1,528 3.5 1.035    
1984 267 1,612 3.5 1.035    
1985 280 1,691 3.1 1.031    
1986 297 1,790 1.3 1.013    
1987 310 1,866 4.2 1.042    
1988 319 1,922 4.0 1.040    
1989 339 2,044 4.7 1.047    
1990 356 2,145 5.4 1.054    
1991 370 2,230 3.7 1.037    
1992 387 2,333 3.0 1.030    
1993 401 2,420 2.6 1.026    
1994 422 2,545 2.8 1.028    
1995 426 2,567 2.6 1.026    
1996 437 2,635 2.9 1.029    
1997 455 2,741 2.1 1.021    
1998 477 2,875 1.3 1.013    
1999 505 3,043 2.5 a 1.025    
2000 531 3,202 3.5 1.035    
2001 561 3,381 2.6 1.026    
2002 592 3,567 1.4 1.014    
2003 606 3,653 2.1 1.021    
2004 612 3,689 2.7 1.027    
2005 627 3,779 4.1 1.041    
2006 656 3,955 3.3 1.033    
2007 680 4,100 2.3 1.023    
2008 711 4,288 5.8 1.058    
2009 744 4,483 0.0 1.000    
2010 761 4,586 . . . . . .    
NOTE: . . . = not applicable.
a. The December 1999 cost-of-living adjustment (COLA) was originally determined to be 2.4 percent, based on the Consumer Price Index (CPI). The underlying CPI was later recomputed by the Bureau of Labor Statistics; a 2.5 percent COLA would have been consistent with the recomputed CPI. Pursuant to Public Law 106-554, benefits were calculated and paid in August 2001 and later as if the December 1999 COLA had been 2.5 percent. Affected beneficiaries received a one-time payment to cover the shortfall that occurred before August 2001.

CONTACT: Alberta Presberry (410) 966-8473 or supplement@ssa.gov.