If you’re faced with a career-ending disability, you may wonder what kind of support the Social Security Administration offers.
In addition to retirement benefits, Social Security covers disability benefits as well to provide an income for disabled individuals who can no longer work. If this applies to your situation, it’s worth understanding how Social Security disability benefits are calculated so you can know what to expect.
When it comes to retirement benefits, the Social Security Administration calculates the monthly amount you receive by taking the average level of earnings from 35 of your highest-earning years. This average earnings level determines the amount of your Social Security benefit.
Needless to say, this is problematic for individuals who have a disability that prevented them from working for a full 35-year period, especially when the disability occurred in the prime earnings years of their 40s or 50s.
Thankfully, the Social Security Administration recognizes this and does not use this exact same calculation to determine the amount of disability benefits you can receive. Still, you need to begin by understanding the retirement benefits calculation if you want to fully comprehend exactly how Social Security disability benefits are calculated, too.
How Social Security Retirement Benefits Are Calculated
When the Social Security Administration calculates your retirement benefit, they start by inflating your historical earnings to reflect historical wage growth using the Average Wage Index. The formula sums up your highest 35 years, divides by 35, and then divides again by 12. The result is your average indexed monthly earnings, or AIME.
If you have fewer than 35 years of covered earnings in your working career, the years with no earnings still go into the formula as zeroes. Zeroes significantly bring down average sums, so this can severely reduce the amount of your Social Security retirement benefits.
Once the formula determines your AIME, the calculation applies that figure to the Social Security benefits formula that is in place the year you attain age 62.
The retirement benefits formula is based on two numbers called “bend points” which creates three separate bands your average income falls into to determine your benefit amount:
- For earnings that fall under the first bend point, you multiply by 90%
- For earnings that fall between the first and second bend point, you multiply by 32%
- For earnings that are greater than the second bend point, you multiply by 15%
When you sum the results of these three calculations up, the result is your primary insurance amount (or PIA). This is also known as your full retirement age (FRA) benefit.
Your FRA benefit will be reduced or increased based on the age at which you file for retirement benefits.
Common Concerns About Social Security Benefits Calculations When You’re Disabled
If you become disabled and can no longer work to earn an income, this calculation process can create a few concerns. Here are a few I’ve heard over the years:
- Does the calculation process for disability benefits penalize individuals who never had the opportunity to work for 35 years? Will zeroes be used in the calculation to determine disability benefits?
- What if you become disabled before you turn 62? What formula is used if you’re younger?
- Are disability benefits reduced because you have to file for them before your designated full retirement age?
Thankfully, these concerns are usually alleviated once you understand how Social Security disability benefits are calculated. The SSA determines disability benefits with a slightly different calculation formula than they use for calculating retirement benefits.
But before you start figuring out how Social Security disability benefits are calculated, you should first determine if you are eligible for these benefits.
The Social Security Administration has strict rules on how an individual qualifies for benefits. It’s likely that if you’re reading this article that you’ve already determined that you are eligible for disability payments.
How Social Security Disability Benefits Are Calculated
When calculating disability benefits, the Social Security Administration first determines how many years should be used in your calculation. To make this determination, they take the number of years from the calendar year you turn 22 through the year the Social Security disability waiting period begins.
Then they subtract one year for every five years of work. This is known as the “one-for-five” rule. They refer to the result as “computation years.”
For example, if you have five years of earnings after age 21 but become disabled at age 26, you get one dropout year for a total of 4 computation years.
Or if you have 10 years of earnings after age 21 before becoming disabled at 31, you’d be eligible to drop two of the lowest-earning years and thus have eight years to use in the computation.
In no case can the number of years used in the calculation exceed 35.
Additionally, there are some childcare dropout rules that allow you to drop out the years you were taking care of a child. The eligibility for the childcare dropout years is very specific and probably best reserved for a conversation between you and your SSDI attorney.
Once the Social Security Administration determines the number of years to use in your calculation, the formula does look a lot like the formula for retirement benefits — but only after accounting for those “dropout” years, so you are not unfairly penalized for years of zero earnings.
The SSA takes the highest earnings from all your work history and indexes them for the wage inflation that occurred during your working years. Once they have your earnings indexed, they take the highest computation years to use in the formula.
For example, if you became disabled at 43 years old, you’d have a total of 22 years to use. Using the “one for five” rule, 4 years would be dropped. They would take the 18 highest indexed earnings years to use in the computation.
Once they had the appropriate number of indexed earnings established, they would then sum them up and simply divide by the number of months in those years. For example, for an individual who had 18 years of indexed earnings, they would divide by 216.
The result would be the average indexed monthly earnings (AIME). Once your AIME is determined, the formula puts that figure through the benefits formula to determine your disability benefits.
Another Key Difference Between Disability Benefits and Retirement Benefits Calculations
Another key difference between how Social Security disability benefits are calculated and how the SSA determines retirement benefits is that with retirement benefits, AIME is calculated through the formula which is in place the year you turn 62.
For disability benefits, they use the formula in the place the year you become disabled.
Let’s assume your AIME is $4,000/month. For the year 2021, the formula has the first bend point at $996 and the second bend point at $6,002. If you become disabled in 2021,
- For earnings that fall under the first bend point, you multiply by 90%
- For earnings that fall between the first and second bend point, you multiply by 32%
- For earnings that are greater than the second bend point, you multiply by 15%
To continue the example of an individual with an AIME of $4,000, we can calculate the exact amount of disability benefits by computing the following:
- AIME under first bend point: $996 x 90% = $896.40
- AIME between first and second bend point: ($4,000-$996) x 32% =$961.28
- AIME greater than second bend point: Nothing to calculate here since earnings did not exceed the second bend point.
The sum of $896.40 and $961.28 will be equal to a total of $1,857.68. This would then be rounded down to $1,857. That’s the estimated amount of Social Security disability benefits you would be entitled to receive in this example
This is how Social Security disability benefits are calculated… but there’s no guarantee you actually receive this amount. From this point, there are certain things that can reduce what you receive in monthly benefits.
Because of this, I urge you to exercise caution when dealing with your SSDI benefits and use the guidance of an attorney who specializes in this area.
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