Calculating Average Indexed Monthly Earnings and Primary Insurance Amount
Determining your average indexed monthly earnings and primary insurance amount can seem like a daunting task due to the intricate calculations involved. While you can theoretically figure it out yourself, this process is complex and involves a series of steps that are best understood through a comprehensive explanation. In this article, we will break down the process, highlighting key aspects and providing clarity on how to calculate these important figures.
Understanding the Basics
The IRS reports your earned income to the Social Security Administration (SSA) with a two-year delay to accommodate for late and refiled tax returns. This data forms the basis for calculating your average indexed monthly earnings and primary insurance amount (PIA), both of which are crucial for determining the Social Security benefits you can receive.
The SSA's Computation Process
The SSA calculates your average indexed monthly earnings using a unique process that involves several steps:
Step 1: Calculating Average Indexed Earnings
The SSA calculates your total wage levels for each wage year. This involves indexing your earnings to account for inflation, allowing for an apples-to-apples comparison. Wage levels after age 60 are not indexed, but starting from age 62, the Consumer Price Index (CPI) is applied instead. The adjustment index is used to ensure that earlier wages are given equal weight to later, more inflation-adjusted wages. Here are the steps:
Indexing Earnings
Each year, the SSA calculates an adjustment index based on wage levels that year compared to the year you turned 60. Wages earned after age 60 are not indexed but are adjusted using the CPI after age 62. This process ensures that the earlier wage levels are adjusted to their inflation-adjusted value, providing an accurate representation of your earnings over your working life.
Selecting the Top 35 Wage Years
The SSA then ranks your indexed earnings and selects the top 35 wage years. This selection is crucial as it forms the basis for calculating your PIA. If you have fewer than 35 years of work but have earned 40 quarters (10 years of work), the result will be lower. It is therefore essential to have at least 35 years of work.
It's important to note that the SSA re-ranks and recalculates your top 35 wage years annually, so even if you have worked for several years after age 60, these later earnings are still considered but not indexed.
Step 2: Calculating the Primary Insurance Amount (PIA)
After determining the average indexed monthly earnings, the SSA uses these figures to calculate the primary insurance amount. The process involves the following steps:
Applying Bend Points
The SSA uses bend points to allocate your wages. The first bend point is 90% of the amount up to the first bend point, the second bend point is 32% from the first bend point to the second bend point, and the third bend point is 15% from the second bend point to the ceiling. These bend points change each year based on the Consumer Price Index (CPI).
Final Adjustment for Full Retirement Age
The SSA applies CPI adjustments from when you were 62 until the present to ensure that the benefits are in line with current economic conditions. This adjustment ensures that the PIA is reflective of your average indexed monthly earnings and inflation over your working life.
Adjusting for Delayed Retirement Claims
Finally, if you claim benefits before or after your full retirement age, the SSA adjusts the PIA based on the number of months you are early or late. If you claim up to age 70, you can increase your benefits by up to 32%.
Conclusion
Calculating your Social Security benefits involves a detailed and multi-step process. By understanding the indexing of earnings, the selection of top 35 wage years, and the application of bend points and CPI adjustments, you can better comprehend how your average indexed monthly earnings and primary insurance amount are determined. This knowledge is invaluable for planning your retirement and ensuring you receive the full benefits you are entitled to.