General Questions on Social Security – Social Security Intelligence

The amount of your monthly Social Security benefit is tied to your earnings history. Those who received higher earnings while working will receive a higher benefit. Those who had lower earnings will receive a lower benefit.

This is because the Social Security system is designed to replace a percentage of your pre-retirement earnings. However, this replacement rate is progressive in that it delivers a higher replacement for lower-income workers than it does for higher-income workers.

To understand how this works it is useful to have a basic knowledge on how Social Security benefits are calculated.

First, Social Security adjusts your earnings for to account for wage inflation over your working lifetime. The calculation takes your 35 best-paid years and produces what it calls your average indexed monthly earnings (AIME).

Second, Social Security applies your AIME to a formula to determine your primary insurance amount (PIA). (That’s the amount of benefit you would receive if you filed at your full retirement age.)

This formula breaks down your AIME into three parts. In 2020, it is:

90 percent of the first $960 of your AIME
plus 32 percent of any amount over $960 up to $5,785
plus 15 percent of any amount over $5,785

Once you calculate those three bands, you sum them up and this is your PIA.

This formula is where the progressive nature of Social Security is found. Those with lower lifetime earnings, and thus lower AIME, get a higher percentage credit to PIA than those at the upper end of the formula.

To read more about how to calculate Social Security benefits, check out my article How To Calculate Your Social Security Benefits: A Step-By-Step Guide

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Social Security is a federal insurance program that provides benefits in the event of retirement, disability, or death. These benefits are payable to a worker, an eligible spouse of a worker, or the eligible child of a worker.

In the United States, the program is administered by the Social Security Administration.

The Social Security system has evolved since its birth in 1935. Originally, it was only a retirement program and was intended to provide a safety net against poverty in retirement. In 1939 the law was changed to add survivors benefits and benefits for the retiree’s spouse and children. In 1956 disability benefits were added.

To qualify for any of these benefits, the Social Security Administration requires you to earn a certain number of credits. In 2020, you receive one credit for each $1,410 in earnings. You can earn a maximum of four credits per year. Most of the programs required 40 credits or 10 years of work.

To read more on the credits required to earn a social security benefit, read my article The 4 Types of Social Security Credits.