Your Social Security benefit calculation starts by looking at how long you worked and how much you made each year. This earnings history is used to calculate your Average Indexed Monthly Earnings (AIME).
The calculation works like this: (An example is shown at the top of this page. If you click on the image, it will enlarge so you can see it clearly.)
First - Start With a List of Your Earnings Each Year
Your earnings history is shown on your Social Security statement, which you can now get online.
In the example above actual earnings are shown in Column C. Only earnings below a specified annual limit are included. This annual limit of included wages is called the Contribution and Benefit Base and is shown as Max Earnings in Column H in the example above.
Second - Adjust Each Year of Earnings for Inflation
Social Security uses a process called wage indexing to determine how to adjust your earnings history for inflation. There are two main steps in the wage indexing process.
- Each year Social Security publishes the national average wages for the year. You can see this published list at the National Average Wage Index page.
- Your wages are indexed to the average wages for the year you turn 60. For each year, you take the average wages of your indexing year (which is the year you turn 60) divided by average wages for the year you are indexing, and multiply your included earnings by this number.
- In the example above look at 1984's earnings of $25,000 in Column C.
- The average earnings that year were $16,134 in column D.
- You take $41,674, the average earnings for the year this person turned 60 (2010 highlighted in green) divided by $16,135, to get the Index Factor you see in Column E.
- Multiply 1984's earnings by this index factor to get $64,575 that you see in Column F.
See two more wage indexing examples from Social Security.
Because of how the wage indexing formula works, if you are not yet 62, your calculation to determine how much Social Security you will get is only an estimate. Until you know average wages for the year you turn 60, there is no way to do an exact calculation. However you could attribute an assumed inflation rate to average wages to estimate the average wages going forward and use those to create an estimate.
Third – Use Your Highest 35 Years of Indexed Earnings And Calculate a Monthly Average
The Social Security benefits calculation uses your highest 35 years of earnings to calculate your average monthly earnings. If you do not have 35 years of earnings, a zero will be used in the calculation, which will lower the average. In the example above you see the highest 35 years in Column G.
Total the highest 35 years of indexed earnings and divide this total by 420 (which is the number of months in a 35 year work history). You see this highlighted in yellow in the example above.
The result: your Average Indexed Monthly Earnings or AIME.
This number is then plugged into the next step: How to Calculate Your Primary Insurance Amount.