# What is the formula for computing Social Security PIA?

You can get an estimate of your Social Security benefit by requesting it from SSA. I think if you oare over a certain age, they send you a statement every year.

What I want to know is the formula for computing the Primary Insurance Amount (PIA), which is the amount you would receive if you start taking your SS benefit at your full retirement age.

The PIA is primarily a function of how much you make over your working life and the years in which you made it. That much I know.

What I want is the specific formula or computation they use to compute the PIA. It might be a straight formula or equation, or it might involve some kind of table look-up. And, yes, the constants used probably change each year. I’m looking for the specifics. Can anyone provide this?

Thanks.

They will tell you projections on your history. I have no idea how it’s calculated.

Nobody knows. It’s one of life’s mysteries.

20 CFR 404.201 et. seq. discusses PIA. PIA is the first step in finding your monthly social security benefit amount payable to you and to members of your family. (BTW, I’m using the same words that the regs use. When Carter was President he mandated that the language in the regs be altered so that a sixth grader can use it; hence the use of “you,” “your,” “we,” etc.) If you retire at full retirement age (which, I believe is 66+ now - it has gone up incrementally for everybody born after the year 1937 until it maxes out at 67), your monthly benefit is equal to your PIA. In all other situations, it does not. Benefits payable to members of your family are a specified percentage of your PIA. The PIA automatically increases to keep it up to date with cost of living (COLA). That’s what the reg says, but this year there was no increase.

If after age 1978 you attain age 62, or become disabled or die before age 62, it is computed under the “average-indexed-montghly-earnings” method. Since this applies to most people, I will limit my discussion to this proviso.

Three major steps are used in computing PIA under the above method. First, your “average indexed monthly earnings” (AIME) are calculated. Earnings before 1951 are not used. All years after 1950 up to, but not including, the year you become entitled to old-age or disability insurance benefits are used in computing the base years. The year of entitlement and following years may be used in a recomputation if it would result in a higher PIA.

Before computing AIME, the “average of the total wages” of all workers for each year from 1951 until the second year before you become eligible are computed. These figures are shown at tables at 20 CFR 404.211. The bases for the computations are described at 404.211. Suffice it to say that for the years after 1978, the W-2 forms are used.

The first step in indexing your earnings is to find the relationship between the average wage of all workers in your computation base years and the average wage of all workers in your “indexing year.” As a general rule, that year is the second year before you reach 62, become disabled, or die before reaching 62

To find that relationship, the average wages for your indexing year is divided by the average wages for each year beginning with 1951 and ending with your indexing year. Those quotients are used to index your earnings for the next step.

The second step is to multiply the actual year-by-year dollar amounts of your earnings (up to the maximum amount credible) by the above quotients. (The quotient for your indexing year is 1, which means that the earnings in that year - and all future years - are used in the actual dollar amount.)

The above is the general method, but there are many variations which I am not going to go into. Thank God for computers.

All I can recommend is using the SSA’s own Detailed Calculator. You can download it, enter information into it and see what you come up with.

As a CPA, that kind of advice sometimes factors in when people are looking at how to fund retirement plans and whether it’s worth paying anything into Social Security that they don’t absolutely have to. Every speaker or resource on the subject has said to use the calculator and see how different scenarios change the resulting benefit. There does not appear to be a simpler way to do it.

I should have searched the web to begin with. Here are the regulations: Code of Federal Regulations, Part404
Have fun. Read 202.01 et seq.

From the publication Social Security Reform Options published by the American Academy of Actuaries in 2007:

A worker’s PIA is determined by his or her career-average earnings. Before averaging, earnings from years before the worker’s 60th birthday are indexed to changes in the national average wage, up to the year the worker turns 60. Earnings at ages 60 and later are included in the calculation of average earnings at nominal value. The 35 highest indexed earnings are averaged and then divided by 12, and the resulting amount is called the average indexed monthly earnings (AIME). For workers reaching age 62 in 2006, the PIA is calculated using the following formula:

90% of AIME up to \$680, plus
32% of AIME from \$680 up to \$4,100, plus
15% of AIME exceeding \$4,100.

The PIA formula percentages (90, 32, and 15) remain the same from year to year, but the “bend points,” the dollar amounts where the percentages change (\$680 and \$4,100), increase each year based on increases in the national average wage. The PIA is indexed to changes in the “consumer price index for urban workers and clerical workers” (CPI-W) beginning with December of the year the worker attains age 62, and this indexing continues once a worker has retired. Indexing earnings to changes in the national average wage helps to ensure that initial Social Security benefits incorporate changes in living standards over a worker’s career, and indexing benefits to changes in the CPI helps to ensure that the buying power of Social Security benefits remains the same after a worker begins receiving benefits.

So to sum it up, if you make more than 50,000 a year over your 30 highest earning years, then every dollar you increase that average increases your benefit by 15 cents.

It would appear from that computation that there is no maximum benefit. Is there some additional factor that places an upper limit on the monthly benefit, or is it truly open ended?

CFR 404.211:

Not all the money you earn is creditable for social security purposes; only the amounts taxed by FICA, which rises every year. I don’t know what the maximum that can be taxed for FICA now, but it’s probably around \$80,000.

The maximum taxable FICA amount is now \$106,800. For the first time since 1972, it was not increased in 2010.