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CRS – How Social Security Benefits Are Computed

How Social Security Benefits Are Computed: In Brief Updated May 13, 2020 – “Social Security,the largest program in the federal budget (in terms of outlays), provides monthly cash benefits to retired or disabled workers and their family members as well as to the family members of deceased workers. In 2019, benefit outlays were approximately $1,048 billion, with roughly 64 million beneficiaries and 178 million workers in Social Security-covered employment. Under current law, Social Security’s revenues are projected to be insufficient to pay full scheduled benefits after 2035. Monthly benefit amounts are determined by federal law. Social Security is of ongoing interest both because of its role in supporting a large portion of the population and because of its long-term financial imbalance, and policymakers have considered numerous proposals to change its benefit computation rules.The Social Security benefits that are paid to worker beneficiaries and to workers’ dependents and survivors are based on workers’ past earnings. The computation process involves three main steps First, a summarized measure of lifetime earnings is computed. That measure is called the average indexed monthly earnings (AIME). Second, a benefit formula is applied to the AIME to compute the primary insurance amount(PIA). The benefit formula is progressive. As a result, workers with higher AIMEs receive higher Social Security benefits, but the benefits received by people with lower earnings replace a larger share of past earnings. Third, an adjustment may be made based on the age at which a beneficiary chooses to begin receiving payments. For retired workers who claim benefits at the full retirement age (FRA) and for disabled workers, the monthly benefit equals the PIA. Retired workers who claim earlier receive lower monthly benefits, and those who claim later receive higher benefits.Retired worker benefits can be affected by other adjustments…”

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