A Five-Minute Guide to Social Security Benefits


If you are unfamiliar with how benefits are calculated under the U.S. Social Security system, you may not understand the potential changes to the scheduled benefits. Here’s a quick tutorial. For more detailed information, please visit ssa.gov/retire.

Funding of the system

System benefits are funded primarily by payroll taxes. Employers and employees each pay 6.2 percent of earnings up to the contribution and benefit base (CBB). The CBB for 2016 is US $118,500.

A smaller portion of the system’s financing comes from taxes on Social Security benefits assessed to certain higher-income individuals.

Who is covered?

Almost all U.S. workers are covered by Social Security. Certain federal, state and local government employees are not covered.

Calculation of benefits

The official name for the system is Old-Age, Survivors and Disability Insurance (OASDI). This summary describes the calculation of the Old-Age benefit only. Rounding of actual benefits may be different than shown in the examples.

Normal Retirement Age (NRA) and Earliest Eligibility Age (EEA)

The NRA is the age at which unreduced retirement benefits are available. For those born before 1938, it is age 65. The NRA increases for those born after 1937, ultimately reaching age 67 for those born after 1959. If you start receiving benefits before NRA, the benefit is reduced for the rest of your life: by 6.67 percent per year for each of the first three years before NRA, and 5 percent per year thereafter. If you delay starting benefits beyond NRA, benefits are increased by 8 percent per year up to age 70 to reflect the shorter expected payment period.

The EEA is the age at which individuals can begin receiving retirement benefits, currently age 62.

Average Indexed Monthly Earnings (AIME)

Earnings up to age 60 (limited by the CBB) are indexed to changes in the national average wage index (AWI). Earnings after age 60 are not indexed. The AIME is the sum of the 35 highest indexed years of earnings divided by 420. For those with fewer than 35 years of earnings, the AIME still is calculated using a denominator of 420.

Primary Insurance Amount (PIA)

The PIA is the basic monthly benefit that is payable when benefits begin at NRA. PIA is calculated using a three-segment formula. Under this formula a participant receives:

  • 90 percent of AIME up to the first “bend point,” which is $856 for those reaching age 62 in 2016;
  • 32 percent of AIME in excess of $856 and up to the second bend point, which is $5,157 in 2016;
  • 15 percent of AIME in excess of $5,157.

The formula is designed to be progressive—that is, more favorable to lower earners. Here is an example.

Year of birth: 1954
NRA: Age 66
AIME: $6,300
PIA = 90% x $856 + 32% x ($5,157 − $856) +15% x ($6,300 − $5,157)
= $770.40 + $1,376.32 + $171.45
= $2,318

The PIA would be payable for benefits starting at age 66. If the participant elected to begin payment four years earlier at age 62, the PIA would be reduced by 25 percent and the monthly payment would be 75 percent of $2,318, or $1,739.


The CBB, AIME and bend points are indexed based on the growth in the AWI. Benefits are indexed after retirement by an annual cost-of-living adjustment (COLA), based on changes in the Consumer Price Index.

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