Appendix D: Computing a Retired-Worker Benefit
This section provides instructions and a worksheet for computing a retired-worker benefit. The worksheet can be used for persons born in 1931 through 1944—that is, those who attained the age of 62 in 2006 or earlier and were under the age of 75 at the end of 2006. The worksheet assumes that the worker had no prior period of entitlement to disability benefits and also did not work after becoming entitled to retired-worker benefits.
The worksheet describes the various steps used in computing a benefit. The steps are based on the following Social Security program goals.
- To provide a benefit based on lifetime earnings. Benefits are related to earnings over a period of time that the worker could be expected to have worked in covered employment—from age 22 through age 61. The years of earnings considered are termed computation years. The worker's 5 lowest earnings years, including years of no earnings at all, are not considered in the computation. They are termed the drop-out years.
- To index lifetime earnings. Earnings used in the computation are not the actual covered earnings but an amount for each year that reflects earnings increases in average wage levels after the year the earnings were paid. This procedure is termed wage indexing. Currently, earnings are generally indexed to wage levels in the year the worker turns age 60. For example, for a person attaining the age of 62 in 2006, actual earnings in 1984 of $20,000 are indexed to $44,187.66, on the basis of 2004 wage levels. Earnings after age 60 are included at their actual (nominal) value.
- To replace a portion of the indexed earnings. Indexed earnings are averaged over the number of computation years to calculate the average indexed monthly earnings (AIME). A benefit formula is applied to the AIME to produce the primary insurance amount (PIA), the amount payable to a worker who retires at the full retirement age (FRA). The benefit formula is weighted to provide a higher replacement of earnings for lower-wage workers. The formula for persons aged 62 in 2006 is 90 percent of the first $656 of AIME; plus 32 percent of the next $3,299; plus 15 percent of the AIME over $3,955.
- To permit early retirement. Persons can retire as early as age 62, but the monthly benefit is reduced. The reduction is 5/9 of 1 percent for each of the first 36 months of entitlement immediately preceding the age at which 100 percent of PIA is payable (66 in 2006 but scheduled to increase to age 67 by 2022), plus 5/12 of 1 percent for each of up to 24 earlier months. For a person aged 62 in 2006, the maximum reduction is 25 percent if the individual is entitled to benefits for all 48 months between ages 62 and 66.
- To provide for price indexing after the age of 62. Benefits are adjusted annually in December to reflect increases in the consumer price index (CPI-W). The benefit increase in 2005 was 4.1 percent. These cost-of-living adjustments are applied to the benefit for each year after the person attained the age of 62—even if the person was not actually receiving benefits.
- To give credit for earnings after age 61. Earnings after the age of 61 (which are not indexed) can be substituted for earnings in earlier years if they result in a higher benefit. In addition, persons who do not receive benefits between the FRA and age 69 may receive increased benefits as a result of the delayed retirement credit (DRC) provision. The benefit is increased by a specified percentage for each month a benefit was not received. (See Table 2.A20 for percentage increases.)
Clarifying the Worksheet Procedure
Step 1 - Determining the Number of Computation Years
For persons who attain age 62 before 1991, the number of years used in the benefit computation equals the number of years after 1950 up to the year of attainment of age 62, minus 5 years. For workers who attain age 62 in 1991 or later, the number of computation years is 35.
Step 2 - Wage Indexing of Earnings
The following description and examples are provided for persons who wish to compute the index factors and indexed earnings. The indexing year is the second year before attainment of the age of 62. However, beneficiaries born on January 1 are deemed to have attained age 62 in the prior year, and consequently, the applicable indexing year, factors, and bend points are those for that year.
The average wage for the indexing year is divided by the average wage in each prior year to obtain the factor for each prior year. For example, a person attains age 62 in 2006. The indexing year is 2004. The average annual wage for 2004 was $35,648.55. The average annual wage for 1990 was $21,027.98. The amount, $35,648.55 divided by $21,027.98, yields a factor of 1.6952912.
The worker's actual earnings covered under Social Security in that year, up to the maximum earnings creditable, are multiplied by the indexing factor to obtain the indexed earnings (see Worksheet 1). For example, actual covered earnings of $10,000 in 1990, multiplied by 1.6952912, result in indexed earnings of $16,952.91; actual earnings of $51,300 (the maximum creditable) result in indexed earnings of $86,968.44.
Step 3 - Computing the Average Indexed Monthly Earnings (AIME)
After the earnings in each year have been indexed, they are used in computing average indexed monthly earnings. The years of highest indexed earnings corresponding to the number of computation years are selected and totaled. This total is then divided by the number of months in the computation years. The result, rounded to the nearest lower dollar, is the average indexed monthly earnings.
For example, for a person attaining age 62 in 2006, the highest 35 years of indexed earnings are used. If the sum of these earnings equals $400,000, the AIME is $952 ($400,000 divided by 420 = $952.38, rounded to $952).
Step 4 - Computing the Primary Insurance Amount (PIA)
The PIA, the amount from which all Social Security benefits payable on a worker's earnings record are based, is computed by applying a formula to the AIME. The formula consists of brackets in which three percentages are applied to amounts of AIME. The dollar amounts defining the brackets are called bend points, and the bend points are different for each calendar year of attainment of age 62. The PIA is rounded to the nearest lower 10 cents.
For retired workers who attained age 62 in 2006, the bend points are $656 and $3,955. Thus the formula is 90 percent of the first $656 of AIME; plus 32 percent of the next $3,299 of AIME; plus 15 percent of AIME above $3,955. The following are examples of PIA computations for such workers with different AIME amounts.
Example 1 - AIME of $300
PIA is $270
Based on: 90 percent of $300
Example 2 - AIME of $952
PIA is $685.12 rounded to $685.10
Based on: 90 percent of $656 ($590.40); plus
32 percent of $296 ($94.72)
Example 3 - AIME of $4,000
PIA is $1,652.83 rounded to $1,652.80
Based on: 90 percent of $656 ($590.40); plus
32 percent of $3,299 ($1,055.68); plus
15 percent of $45 ($6.75)
The above calculations are applicable to workers who attain the age of 62 in 2006. For workers who attained age 62 in prior years, the bend points will be different, and the PIA must be increased to reflect cost-of-living adjustments between the year of attainment of age 62 and 2006. Worksheet 2 shows cost-of-living increase factors for 1979 through 2005. After the PIA is calculated for the year of attainment of age 62, cost-of-living increases are applied for each year through 2005. The result is the current 2006 PIA.
For example, a worker who attained age 62 in 2003 would receive cost-of-living adjustments for the years 2003–2005. The adjustments are cumulative, with each step rounded to the next lower dime. If the PIA at age 62 was $500, the cost-of-living adjustments would be:
2003: $500 multiplied by 1.021 = $510.50
2004: $510.50 multiplied by 1.027 = $524.20
2005: $524.20 multiplied by 1.041 = $545.60
$545.60 would be the PIA effective December 2005.
Step 5 - Computation of the Monthly Benefit
The full PIA is payable to a worker who retires at the full retirement age (FRA). Beginning in the year 2000, the FRA, scheduled to be gradually raised to age 67 for workers attaining age 62 in 2022, began to be phased in. Workers can still retire as early as age 62, but the monthly benefit is reduced by 5/9 of 1 percent for each of the first 36 months of entitlement immediately preceding the full retirement age plus 5/12 of 1 percent for each of up to 24 earlier months. Workers attaining the age of 62 in 2006 have their benefits computed based on the full retirement age of 66. See Table 2.A17.1 to determine the FRA based on the year of birth as well as the reduction factors. For individuals electing benefits at exactly age 62 in 2005, the maximum reduction is 25 percent.
For example, in 2006 a worker with a PIA of $500 would receive $375 at the age of 62. The PIA is reduced by $124.99, reflecting a reduction rate of 5/9 of 1 percent for each of 36 months and a rate of 5/12 of 1 percent for each of 12 months for a total reduction of 25 percent. After reduction of the PIA by $124.99, the benefit amount is rounded down to the nearest lower dollar.
|STEP 1.—Determining the Number of Computation Years|
|1||Year of birth. (If your birthday is January 1, enter prior year.)|
|2||Age "62" has been entered.||62|
|3||Add lines 1 and 2 to obtain year of attainment of age 62 (year of eligibility).|
|4||Year of attainment of age 22. If 1951 or earlier, enter 1951 (If your birthday is January 1, enter prior year.)|
|5||Subtract line 4 from line 3 (elapsed years).|
|6||"5" (drop-out years) has been entered.||5|
|7||Subtract line 6 from line 5 (computation years—maximum 35).|
|STEP 2.—Indexing of Earnings (Use Worksheet 1 for Steps 2 and 3.)|
|8||Enter in column 2 your earnings in each year 1951 through 2005. If none, enter "0."|
|9||Column 3 contains the maximum earnings creditable under Social Security for each year.|
|10||Enter in column 4 the lower amount from columns 2 or 3 for each year.|
|11||Enter in column 5 the indexing factors applicable to the year you attained age 62 (line 3) from Table 2.A8.
(This table contains the indexing factors for persons attaining age 62 during the period 1993–2006.)
|12||Multiply column 4 by column 5 and enter results in column 6 in dollars and cents. These are your indexed earnings.|
|STEP 3.—Computing the Average Indexed Monthly Earnings (AIME)|
|13||Enter the number of computation years from line 7.|
|14||Place an "X" in column 7 next to the highest indexed earnings corresponding with the number of computation years from line 13.|
|15||Add all individual indexed earnings marked with an "X."|
|16||Multiply line 13 (computation years) by 12 to obtain the number of months in the computation period.|
|17||Divide line 15 by line 16.|
|18||Round the result in line 17 to the next lower dollar. This is your average indexed monthly earnings (AIME).|
|STEP 4.—Computing the Primary Insurance Amount (PIA) (Use Worksheet 2 for Step 4.)|
|19||Enter first bend point from Worksheet 2 based on year of attainment of age 62, or prior year if birthday is January 1.|
|20||Enter second bend point from Worksheet 2.|
|21||If your AIME (obtained in line 18) is equal to or less than line 19, complete lines 22–24; if greater than line 19 but less than or equal to line 20, complete lines 25–30; if greater than line 20, complete lines 31–37.|
|22||Enter your AIME from line 18.|
|23||"0.9" has been entered. If you receive a pension on the basis of noncovered employment, see Table 2.A11.1.||0.9|
|24||Multiply line 22 by line 23, and round to next lower dime to obtain your PIA at age 62. Continue with line 38.|
|25||Enter your AIME from line 18.|
|26||Multiply line 19 by 0.9. If you receive a pension on the basis of noncovered employment, see Table 2.A11.1.|
|27||Subtract line 19 from line 25.|
|28||"0.32" has been entered.||0.32|
|29||Multiply line 27 by line 28.|
|30||Add lines 26 and 29, and round to next lower dime to obtain your PIA at age 62. Continue with line 38.|
|31||Enter your AIME from line 18.|
|32||Multiply line 19 by 0.9. If you receive a pension on the basis of noncovered employment, see Table 2.A11.1.|
|33||Subtract line 19 from line 20 and multiply by 0.32.|
|34||Subtract line 20 from line 31.|
|35||"0.15" has been entered.||0.15|
|36||Multiply line 34 by line 35.|
|37||Add lines 32, 33, and 36, and round to the next lower dime to obtain your PIA at age 62. Continue with line 38.|
|38||If you attained age 62 in 2006, skip to line 44. Otherwise you will need to adjust your PIA to reflect cost-of-living adjustments (COLAs) from the year you attained age 62 through 2005 by using lines 39–43 and Worksheet 2.|
|39||Enter year of attainment of age 62 from line 3.|
|40||Place an "X" corresponding to the year you attained age 62 in column 5, Worksheet 2.|
|41||Place an "X" in column 5 (Worksheet 2) next to each subsequent year through 2005.|
|42||Enter your PIA at age 62 from either line 24, 30, or 37—here and in the first row of Worksheet 2.|
|43||Beginning with first year marked, multiply your PIA at age 62 by the corresponding factor (column 4), round to the next lower dime, and enter in column 6. The resulting PIA is then multiplied by the next factor and is again rounded to the next lower dime. Continue this process through 2005. Enter this last figure, which is your current PIA.|
|STEP 5.—Computing the Monthly Benefit|
|44||Enter your current PIA from either line 24, 30, 37, or 43.|
|45||Using Table 2.A17.1, determine your full retirement age and enter here.|
|46||If you retired at your full retirement age, round PIA from line 44 to the next lower dollar to obtain your monthly benefit.|
|47||If you retired before the full retirement age, enter your age at retirement including year and months.|
|48||Subtract line 47 from line 45, and convert the result to months to determine the total number of reduction months.|
|49||If line 48 is greater than 36 subtract 36 and enter the number here.|
|50||"0.0055556" (the decimal equivalent of 5/9 of 1 percent—the monthly reduction factor for the first 36 months) has been entered.||0.0055556|
|51||"0.0041667" (the decimal equivalent of 5/12 of 1 percent—the monthly reduction factor for months above 36) has been entered.||0.0041667|
|52||Multiply line 48 (but not more than 36) by line 50 to obtain the percent reduction for the first 36 months.|
|53||Multiply line 49 by line 51 to obtain the percent reduction for months in excess of 36.|
|54||Add lines 52 and 53 to obtain the total percent reduction.|
|55||Multiply line 44 by line 54 to obtain the amount of benefit reduction.|
|56||Subtract line 55 from line 44, and round to the next lower dollar to obtain your monthly benefit.|
2 or 3
|Year||1st bend point
|2nd bend point
|Age 62 PIA:|
|2006||656||3,955||. . .||. . .|
|NOTE: . . . = not applicable.|
|a. The December 1999 cost-of-living adjustment (COLA) was originally determined to be 2.4 percent, based on the consumer price index (CPI). The underlying CPI was later recomputed by the Bureau of Labor Statistics; a 2.5 percent COLA would have been consistent with the recomputed CPI. Pursuant to Public Law 106-554, benefits were calculated and paid in August 2001 and later as if the December 1999 COLA had been 2.5 percent. Affected beneficiaries received a one-time payment to cover the shortfall that occurred before August 2001.|
CONTACT: Alberta Presberry (410) 966-8473.