Social Security

To many Americans it’s a mystery of how their Social Security is calculated, and rightly so. However, it is not that complicated.

Social Security determines your average indexed (inflation-adjusted) monthly income, or AIME by applying its average wage index to your income history and then calculating the average monthly income based on your 35 highest-earning years. They include zeros for any of your 35 years without income.

Such indexation ensures that a worker’s future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime. This is necessary because 35 years of earnings are used whereas a typical pension plan will use a five year average + or -.

Once the average earnings are determined the SSA multiplies your AIME by fixed percentages at three different income levels called “bend points.” Think of this as the benefit formula.

For example, if you’re first eligible for retiree benefits in 2021, you’d receive 90% of your AIME up to $996, 32% of your AIME between $997 and $6,002, and 15% of your AIME for anything above $6,002. The resulting figure is your primary insurance amount, or PIA. Your monthly benefit at full retirement age based on you date of birth.

As you can see, the lower income beneficiary receives a higher income replacement because more of their earnings have the higher 90 or 32 percentages applied. At the same time they are paying less in taxes because of their lower income while higher paid workers pay more in taxes and received a lower return when their benefit is calculated.


  1. Also of interest is that 35 years of paying maximum FICA Tax does not guarantee the maximum benefit. In my case, in the early seventies, I paid the maximum FICA Tax but those years, adjusted for inflation did not adjust to the level needed to collect the max SS benefit. I got close but not close enough per my expectations.


  2. I would also like to add that you need 40 qualifying quarters to be eligible for Social Security. This is important to all those youngster you know who like working under the table. A qualifying quarter is earning $1470 (for 2021) which is about working 15.6 hrs per week for 13 weeks at the federal minimum wage of $7.25. 40 quarters is 10 years worth of work.

    Also by earning your 40 quarters, while paying the Medicare tax, you will become eligible for the free Medicare part A.

    Why is this important? My wife was working under the table. I insisted that her boss either pay her above the table or get a 1099 form. She ended up with a 1099 form and I paid the Social Security, Medicare, and income taxes when we filed our income taxes. She never planned it, but she ended up working there for 10 years under a 1099. If that was her only work history, it would have been a problem if she continued working under the table and she may have never had the 40 qualifying quarters for Social Security nor Medicare. But because we filed the 1099, she now has a complete 35+ year work history when added to her other jobs and she will get a higher Social Security benefit just on her own record.


      1. Of course not. We were lucky his accountant didn’t charge extra for the 1099 or we would not have gotten one. My wife worked that job because she like the work and had flexible hours for child care.


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