How to Better Understand Your Social Security Check

by Marc Bastow | May 10, 2013 9:10 am

What started as a throwaway comment from my brother last weekend piqued my interest in a rather basic question: How is my Social Security benefit calculated?

It’s funny. In all the years I’ve received my SSA statement, I’ve never thought about the consequences of the information it contains. Now I have … and just a bit to my dismay.

For those of you unsure about how it all works, here’s a basic road map showing how SSA figures out how big (or small) those checks must be cut.

Step 1: Your (Recalculated) Earnings History

Every time you get paid at work, you pay into the Social Security system, and the SSA keeps those wage records. To get things started, SSA will use wage indexing to adjust your (annual) wage history for inflation.

The process involves two steps:

  1. SSA determines and publishes the national average wages for the year.
  2. SSA recasts your annual wages to calculate your historical earnings adjusted for inflation. The Wage Index Series[1] index figure is calculated by taking the average wages in the year in which you turn 60, (let’s say 2010) and dividing it by any year in which you earned wages (let’s say 2000).

Here’s an example:

Step 2: Averaged Monthly Earnings

SSA computers look for the 35 years during which you made the highest (pre-index adjusted) actual wages, adjusts them accordingly, adds them up and divides by 420 (35 years x 12 months) to come up with your Average Indexed Monthly Earnings.

For any years within the 35 in which you did not provide SSA with an annual gross income number, the computers simply insert $0 for those years and continue with the calculations. You get a statement every year from the SSA, so you should be able to keep track. Of course, if you’ve “misplaced” them, you can go to the SSA website[2] for the records.

Step 3: The Primary Insurance Amount

Armed with your AIME, the computers now grind through yet another formula that includes a “Bend Points” calculation, designed to level the playing field among those in the overall pool who’ve earned more — or less –than others. The SSA provides a Benefit Formula Bend Points chart[3] to help guide you along the way.

Your next step is to apply the Bend Points to the AIME. Bend points for 2013 are $791 for the first 90% of AIME, 32% of the next $3,977 of AIME, and 15% over any point beyond $4,768 (or the first two bend points combined).

Let’s use another example:

Let’s say your AIME is $5,000 per month. Then …

Primary Insurance Amount: $2,019.34, to which you are entitled when you reach your full retirement age[4].

You can see how the Bend Points work: Essentially, that stub point beyond the second “bend” represents additional earnings that are diminished in retirement value relative to the first two bend points.

To start the process of finding your PIA, visit the Social Security Administration website[5]. It might take you a while to get through the steps required, but probably less time than it would take you by hand.

Where it all gets a bit disappointing: No matter how much that “stub” amount adds to your bottom line, for those who reach full retirement age in 2013 and are entitled to (and take) the maximum Social Security benefit at that time, your monthly check will be no larger than $2,533. There is no math that provides a calculation to the number, it is just so, according to the SSA[6].

We can find another day to debate whether or not that’s a lot of money relative to — well, whatever you might want to make it relative to — but that’s what you’ll get.

Just as important than the “payoff” are some takeaways from the process:

  1. It pays to keep working, especially if you don’t have 35 years of work logged in the system. Just like on a pop quiz, a zero will crush your average.
  2. I know many of you want to start taking SSA benefits at 62. But as a reminder, your maximum benefit doesn’t start until somewhere north of 66. According to SSA, the maximum benefit if your retire at age 62 in 2013 is $1,923 — $600 less than if you had waited for full retirement age.
  3. That Social Security paycheck gets even better if f you can wait until you are 70. Social Security benefits are increased by a certain percentage (depending on your date of birth) if you delay receiving benefits until after your full retirement age. Your benefit amount is increased until you start taking benefits or you reach age 70. If you retire at 70, the maximum climbs to $3,350 per month, or roughly $800 more than you’d get if you started taking payments as soon as you reached FRA.

Because you won’t know your average wage number until you’re 60, there’s no reason to worry about the calculations until then. Still, keep your eye on those annual SSA letters so nothing takes you by surprise once you’re ready to start looking at the numbers.

Marc Bastow is an Assistant Editor at

  1. Wage Index Series:
  2. SSA website:
  3. Benefit Formula Bend Points chart:
  4. full retirement age:
  5. Social Security Administration website:
  6. according to the SSA:

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