The Social Security Administration calculates the retirement benefits it provides based on a person's work history, and each calculation is individual to the worker. A worker must have 10 years or 40 credits to receive retirement benefits, but Social Security calculations cover a period of the 35 highest years of earnings. Workers who do not have 35 years of earnings have a few zeros. The lowest years do not count for workers who have more than 35 years of earnings history.
Indexing
Social Security indexes your earnings to account for early years of employment and the value of the dollar. Each year has an index factor, and Social Security calculates the average indexed monthly earnings (AIME). The earning years are selected, then indexed. The computer program totals the indexed figures and divides by the total number of months (420) in the work years. The AIME is that average figure rounded off to the nearest dollar.
Primary Insurance Amount
The primary insurance amount (PIA) is 100 percent of the worker's benefit entitlement calculated at full retirement age. This calculation comes from the PIA formula determined by law, based on the national average wage index. The formula calculates three separate percentages of the AIME based on the "bend" points in the formula. You can use the worksheet Social Security provides and the Social Security statement mailed to your home each year to try to calculate your personal PIA.
Application
Calculations change at full retirement age, and full retirement age for individuals born between 1942 and 1954 is 66. A person whose full retirement age is 66 but retires at age 62 receives about 75 percent of the PIA. A person who retires at age 66, or full retirement age, receives 100 percent of PIA. Retirement at age 70 provides a person about 130 percent of PIA. A spouse can receive benefits based on the worker's work history at 50 percent of the worker's PIA at full retirement age. Early retirement at age 62 gives the spouse about 35 percent of the worker's PIA.
Changes
If you collect early retirement benefits and continue to work, you may incur penalties from Social Security. For penalty months, Social Security recalculates your benefits at full retirement age to add these months back into the formula. This may increase your benefits slightly from the original calculations of the PIA. Cost-of-living adjustments (COLA) also affect the PIA to your advantage, and Social Security adds these COLAs to your benefits starting at age 62 whether you receive benefits at that age or not. If you have one of your highest-earning months after retirement, Social Security may recalculate your benefits as well.
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