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Retirement

Social Security

How Social Security Calculates Your Benefits

Robert A. Di Ieso, Jr.

Q. Is it possible to obtain the inflation index that Social Security uses to adjust each year’s earning such that I could attempt to perform the overall calculation myself? I’m interested in knowing whether any of my earnings prior to 35 years ago are being counted in the index rather than the most recent 35 years’ worth. — Bob

A. Bob, you must have a masochistic streak! You can do what you suggest but it may wear out your calculator.

Social Security has a different index for every year! It is based not on prices but on wages. Basically, the agency adds up all the wages earned in the nation each year (there's a two-year lag to get this data), divides them by the number of workers, and looks at how much wages per person have risen from year to year. The actual mathematical process is, of course, much more complicated.

These annual wage changes produce a set of indexing factors. The way these factors affect your own benefits is keyed to the year in which you first become eligible for benefits. For retirement benefits, this is 62. Entering this calendar year in an online tool will give you the annual indexing factors you can apply to your own earnings. Take your annual covered earnings (the earnings on which you pay Social Security payroll taxes), multiply it by that year's index factor and you will obtain your indexed wage for each year you have worked.

Next, add up all these indexed wages and divide them by 35 to determine your average wage. If you've not worked 35 years, use zeroes for any missing year until you have 35 numbers. Finally, you need to find out what's called your Average Indexed Monthly Earnings. So, multiply your 35 years of highest indexed earnings by 12 and then divide this total by 420 (the number of months in 35 years).

Your Average Indexed Monthly Earnings is the figure on which your retirement benefits are based. And it will change to reflect a new "top 35" earnings year. If interested, the way the AIME determines your benefits is explained here.

If you have not given up by now, you also need to know that Social Security only indexes your wages until you are 60. For later years, it simply uses the actual amount of your covered earnings. For this reason, people who keep working in their later years will often see their benefits automatically recomputed upward to reflect a new top-35 year.

Clear as mud, right?

Anyway, that's how it works. Or at least I think it is. Honestly, it is so confusing that even experts, including me, make mistakes.

Best of luck!

Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at moeller.philip@gmail.com or @PhilMoeller on Twitter.