The Social Security Administration computes Social Security benefits based upon “average indexed monthly earnings,” (“AIME”) which are the sum of up to 35 years of a worker’s indexed earnings. A formula reflecting changes in general wage levels based upon measurements by the national average wage index is applied to the AIME to compute the primary insurance amount (PIA), which is the basis for any benefits paid to an individual.
The PIA is the benefit a person receives if he/she begins to receive retirement benefits at normal retirement age. Thus, at the age of normal retirement, the benefit is neither reduced for early retirement nor increased for delayed retirement.
The PIA is the sum of three separate percentages of the AIME based upon certain portions of the AIME. The portions depend on the year in which a worker reaches age 62, becomes disabled before age 62, or dies before reaching age 62. Federal law fixes the percentages of this formula with the applicable dollar amounts changing annually to correlate with the national average wage index. The formula’s dollar amounts, or “bend points,” apply to the separate percentages that make up the AIME. These bend points are $885 and $5,336 for the year 2017 PIA formula and apply for workers newly eligible in 2017.
For example, a worker who retires in 2017 at age 62 with maximum-taxable earnings in each year since age 22, would have an AIME in the amount of $9,784. Based on this amount and the 2017 bend points of $885 and $5,336, the worker’s PIA would equal $2,888.00, and thus the worker would receive a reduced benefit based on the $2,888.00 PIA. The worker would receive his or her first cost-of-living adjustment (COLA) in December of 2017.
Of course, monthly retirement benefits derived from the PIA may be higher or lower than the PIA based upon an individual retiring before normal retirement age. A person may not collect retirement benefits before age 62. For persons retiring at age 62 in 2017, their benefit will be 25 percent less than their PIA.
Benefit amounts may obviously be higher than the PIA for workers who retire after normal retirement age. Credits for delayed retirement will gradually reach 8 percent annually for individuals born after 1942, but no delayed retirement credit will apply after age 69.
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