The formula used to compute the PIA reflects changes in general wage levels, as measured by the national average wage index. We have constructed examples to illustrate how retirement benefits are calculated.
Average Indexed Monthly Earnings (AIME)
Up to 35 years of earnings are needed to compute average indexed monthly earnings. After we determine the number of years, we choose those years with the highest indexed earnings, sum such indexed earnings, and divide the total amount by the total number of months in those years. We then round the resulting average amount down to the next lower dollar amount. The result is the AIME.
An insured worker becomes eligible for retirement benefits when he or she reaches age 62. If 2020 were the year of eligibility, we would divide the national average wage index for 2018 (52,145.80) by the national average wage index for each year prior to 2018 in which the worker had earnings and multiply each such ratio by the worker's earnings. This would give the indexed earnings for each year prior to 2018. We would consider any earnings in or after 2018 at face value, without indexing. Then we would compute the AIME and use this amount in computing the worker's primary insurance amount for 2020.
Primary Insurance Amounts
The bend points in the year 2020 PIA formula, $960 and $5,785, apply for workers becoming eligible in 2020. See the table of bend points for the bend points applicable in past years.
For example, a person who had maximum-taxable earnings in each year since age 22, and who retires at age 62 in 2020, would have an AIME equal to $10,683. Based on this AIME amount and the bend points $960 and $5,785, the PIA would equal $3,142.70. This person would receive a reduced benefit based on the $3,142.70 PIA. The first COLA this individual could receive is the one effective for December 2020. See the monthly benefit amount for this example and other examples with maximum-taxable earnings.
Monthly Benefit Amounts
Benefits can be higher than the PIA if one retires after the normal retirement age. The credit given for delayed retirement will gradually reach 8 percent per year for those born after 1942. A table illustrates the complex interaction among normal retirement age, actuarial reduction, and delayed retirement credit. No delayed retirement credit is given after age 69.
Benefits to family members may be limited by a family maximum benefit.
Two other methods for computing retirement benefits were common in the past, but today have very limited applicability.