Social Security Retirement Calculation

ACCOUNTING 325

SPRING 2010

The Current Social Security Retirement Benefit Calculation

By James E. Williamson and Nathan Oestreich

The Social Security retirement benefit that a worker will receive, if retiring at full retirement age (age-66 for those born between 1943 and 1954)), is called the primary insurance amount (or PIA).  Many of the worker’s other benefits, including family benefits, are based on this PIA.  The calculation of this PIA provides a much larger benefit to lower or middle income workers (relative to the amount of tax paid into the system) than it does to the high income worker.  Up to a certain level of inflation adjusted average monthly income^[1] that social security taxes were paid on during the qualifying years (called a bend point) the PIA will include 90 percent of that amount.  In the calculation, there is a second level of inflation adjusted average monthly income (from bend point one to bend point two). The PIA will include 32 percent of that amount.  A third level of inflation adjusted average monthly income that social security taxes were paid on during the qualifying years is measured from bend point two to the social security taxable income ceiling.  The PIA only includes 15 percent of this amount.  This calculation is illustrated below, using the 2009 bend points, for a wage level inflation adjusted average monthly income of $8,900:

Table 1

Calculation of PIA

           First Bend Point            Second Bend Point    Maximum Income Level    

0                   $744                               $4,483                         $8,900

Range           (744 * .90)    +             ((4,483 – 744) * .32)   +       ((8,900 – 4,483) * .15)

PIA                      670                    +                1,196                 +                663         =  $2,529

As illustrated, the worker paying the maximum amount into the social security system on $106,800 ($8,900 x 12) of annual wages, would receive a monthly PIA of $2,529 or $30,348 annually.  However, a middle income worker paying into the social security system on $53,796 ($4,483 x 12) would receive a monthly benefit of $1,866 ($670 + $1,196) or $22,392 annually.  Clearly, this illustrates the benefit advantage to the middle-range worker. The high-range income worker receives only $663 more per month than the middle-range income worker while having paid almost twice as much in social security taxes  (see Table Ia).