How Does Social Security Get Calculated?

Social Security Card with calculator and money.
Bill Oxford / Getty Images/iStockphoto

Most people who receive social security benefits get their check every month and don’t really think about it much after. We are all more or less versed in the knowledge that our social security amount is somehow tied to what we paid in over the years.

See: Social Security: Understanding the Basics
Find: 5 Things Most Americans Don’t Know About Social Security

But how exactly is it calculated?

Social security benefits are based on your lifetime earnings, but not all of them. The IRS states that your actual earnings are adjusted or “indexed” to account for changes in average wages since the year the earnings were received. Additionally, Social Security also takes your 35 highest-earning years to calculate your average indexed monthly earnings.

A formula is then applied to this 35-year high-earning period to arrive at your basic benefit or “primary insurance amount” giving you how the amount you will receive in each check at your full retirement age.

To get a better idea of how much you will receive, you can also check out the IRS Social Security Calculator here.

Important to note: You can begin to receive your Social Security benefits early at age 62 but the benefit will be reduced. This means if you use the calculator to estimate an amount you could receive today, if you take your benefit at 62 the actual amount will be lower. Further, your basic benefit will be reduced by a certain percentage if you decide to retire before reaching the full retirement age of 65.

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See: What Happens to Social Security When You Die?
Find: Key Points COVID-19 Long-Haulers Need to Know About Applying for Social Security

Also important: You become eligible for cost-of-living benefit increases starting with the year you become 62, even if you do not start to take benefit until your full retirement age or even at age 70. This cost of living adjustment, or COLA, is adjusted every year for inflation and the increased costs of living as the years progress. Although the amounts have been small in recent years with very low inflation, the Senior Citizens League is calling for a 6% increase for next year’s benefits due to surging prices and costs this year.

If you have any questions or are still unsure about your benefit and if you are receiving the correct amount, it is important to call Social Security yourself at 1-800-772-1213 (for the deaf or hard of hearing, call the TTY number, 1-800-325-0778). An actual Social Security representative can get on the line with you and answer any questions or concerns you may have.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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