Appendix C

Formula For Computing Benefits[248]

The Social Security Amendments of 1977 provided a new method for determining an individual’s primary insurance amount. This method uses a formula based on “wage indexing” and was fully explained with interim regulations and final regulations published in the Federal Register on December 29, 1978, at 43 FR 60877 and July 15, 1982, at 47 FR 30731 respectively. It generally applies when a worker after 1978 attains age 62, becomes disabled, or dies before age 62. The formula uses the worker’s earnings after they have been adjusted, or “indexed,” in proportion to the increase in average wages of all workers. Using this method, we determine the worker’s “average indexed monthly earnings.” We then compute the primary insurance amount, using the worker’s average indexed monthly earnings. The computation formula is adjusted automatically each year to reflect changes in general wage levels.

Average Indexed Monthly Earnings

To assure that a worker’s future benefits reflect the general rise in the standard of living that occurs during his or her working lifetime, we adjust or “index” the worker’s past earnings to take into account the change in general wage levels that has occurred during the worker’s years of employment. These adjusted earnings are then used to compute the worker’s primary insurance amount.

For example, to compute the average indexed monthly earnings for a worker attaining age 62, becoming disabled, or dying before attaining age 62, in 1989, we divide the average of the total wages for 1987, $18,426.51, by the average of the total wages for each year prior to 1987 in which the worker had earnings. We then multiply the actual wages and self-employment income as defined in section 211(b) of the Act credited for each year by the corresponding ratio to obtain the worker’s adjusted earnings for each year. After determining the number of years we must use to compute the primary insurance amount, we pick those years with highest indexed earnings, total those indexed earnings and divide by the total number of months in those years. This figure is rounded down to the next lower dollar amount, and becomes the average indexed monthly earnings figure to be used in computing the worker’s primary insurance amount for 1989.

Computing the Primary Insurance Amount

The primary insurance amount is the sum of three separate percentages of portions of the average indexed monthly earnings. In 1979 (the first year the formula was in effect), these portions were the first $180, the amount between $180 and $1,085, and the amount over $1,085. The amounts for 1989 are obtained by multiplying the 1979 amounts by the ratio between the average of the total wages for 1987, $18,426.51, and for 1977, $9,779.44. These results are then rounded to the nearest dollar. For 1989, the ratio is 1.88421. Multiplying the 1979 amounts of $180 and $1,085 by 1.88421 produces the amounts of $339.16 and $2,044.37. These must then be rounded to $339 and $2,044. Accordingly, the portions of the average indexed monthly earnings to be used in 1989 are determined to be the first $339, the amount between $339 and $2,044, and the amount over $2,044.

Consequently, for individuals who first become eligible for old-age insurance benefits or disability insurance benefits in 1989, or who die in 1989 before becoming eligible for benefits, we will compute their primary insurance amount by adding the following:

(a) 90 percent of the first $339 of their average indexed monthly earnings, plus

(b) 32 percent of the average indexed monthly earnings over $339 and through $2,044, plus

(c) 15 percent of the average indexed monthly earnings over $2,044.

This amount is then rounded to the next lower multiple of $.10 if it is not already a multiple of $.10. This formula and the adjustments we have described are contained in section 215(a) of the Act (42 U.S.C. 415(a)).


[248]  In compliance with Social Security Act §215(a)(1)(D), this formula was published in the Federal Register (49 FR 43778) on October 31, 1984.