How Social Security Benefits Are Computed: In Brief

Source: Noah P. Meyerson, Congressional Research Service, CRS Report for Congress, R43542, May 12, 2014

With $812 billion in benefit outlays in 2013, Social Security is the largest program in the federal budget. It provides monthly cash benefits to retired and disabled workers and their family members as well as to the family members of deceased workers. Currently, there are about 58 million beneficiaries. Under current law, Social Security’s revenues are projected to be insufficient to pay full scheduled benefits after 2033.

Monthly benefit amounts are determined by federal law. Social Security is an issue of ongoing interest both because of its role in supporting a large portion of the population and because of its long-term financial imbalance, and policy makers have considered numerous proposals to change its benefit computation rules.

The Social Security benefits that are paid to worker beneficiaries and to workers’ dependents and survivors are based on workers’ past earnings. The computation process involves three main steps:
• First, a summarized measure of lifetime earnings is computed. That measure is called the average indexed monthly earnings (AIME).
• Second, a benefit formula is applied to the AIME to compute the primary insurance amount (PIA). The benefit formula is progressive. As a result, workers with higher AIMEs receive higher Social Security benefits, but the benefits received by people with lower earnings replace a larger share of past earnings.
• Third, an adjustment may be made based on the age at which a beneficiary chooses to begin receiving payments. For retired workers who claim benefits at the full retirement age (FRA), which is currently 66, and for disabled workers, the monthly benefit equals the PIA. Retired workers who claim earlier receive lower monthly benefits, and those who claim later receive higher benefits.

Benefits for eligible dependents and survivors are based on the worker’s PIA. For example, a dependent spouse receives a benefit equal to 50% of the worker’s PIA, and a widow(er) receives a benefit equal to 100% of the worker’s PIA. Dependent benefits may also be adjusted based on the age at which they are claimed.