Your Social Security pension is calculated using an average of your highest 35 years of earnings history. But it’s not straight and simple to calculate because of the progressive formulas that your earnings history is subject to.

That’s right, Social Security is designed to be more beneficial to lower income earners and less beneficial to higher income earners. You can see just how this is accomplished in Step #2 – Bend Point Formula.

But, don’t worry high income earners. You still get extra Social Security the more you make, it’s just the percentage increase in you Social Security will go down as you climb the income ladder.

Another benefit for high income earners is that you stop paying Social Security taxes on amounts in excess of $118,500 annually based on 2016 limitations. The normal tax rate for the Social Security portion of your payroll tax withholding is 6.2%. Every dollar you make over $118,500 in 2016 does not get Social Security tax withheld.

No matter what end of the spectrum you’re on, Social Security has it’s benefits.

Here’s How Social Security Is Calculated

Step #1 – Average Indexed Monthly Earnings (AIME)

Add your highest 35 years of earnings history[1] and divide by the number of months in 35 years (420). This can be found by going to the Administration’s website at https://secure.ssa.gov and clicking on Sign In / Up. Once you’re logged in, click on the “Earnings Record” tab. This is like going back in time; I’m actually surprised the government keeps records that are this accurate.

The result of taking 35 years of indexed wages and dividing by 420 is called your Average Indexed Monthly Earnings (AIME).

Step #2 – Bend Point Formula

Next step is to apply the “Bend Point Formula” to arrive at your Primary Insurance Amount (PIA).

So what exactly does this formula accomplish? Basically, this is where Social Security gets progressive. This formula makes lower earnings worth more and higher earnings worth less.

Unfair you may say? Sure, but our whole tax system is setup this way so this is in-line with what you’d expect.

The formula is applied like this using 2016 numbers:

  • The first $856 of your AIME is multiplied by 90%
  • Amount of AIME between $857 and $5,157 is multiplied by 32%
  • Amount of AIME above $5,157 is multiplied by 15%

For example, if your AIME is $6,000 then applying the bend point formula results in a Primary Insurance Amount of $2,273 as shown in the chart below.

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Step #3 – Primary Insurance Amount

The output of the bend point formula applied to AIME is the Primary Insurance Amount (PIA). This is the benefit amount at full retirement age which depends on the year in which you were born. In the previous example, the monthly Social Security pension amount is $2,273.17 at full retirement age. The amount of taxes due on this monthly pension amount is subject to your other income as shown in How Is Social Security Taxed.

Not Enough?

For most people it isn’t. The average Social Security check for a retiree is $1,341 according to the SSA[2]. Most of us can’t rely on Social Security alone. We have to either keep working or draw down from our asset base. The entire point point this website is to help you figure out how much you’ll need in retirement, if you’re on track, and the best way to optimize your retirement income.


[1] Don’t have 35 years of earnings history? No problem. Fill in zeroes for the years in which you didn’t have an earnings history. You’ll also have to adjust your earnings based on the index factor that SSA uses.

[2] This is as of January 2016 and changes monthly. It seems alarming low to me but remember that this is an average payment.