Step 2 - Calculate The Average Indexed Monthly Earnings

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Step 2 - Calculate The Average Indexed Monthly Earnings (AIME)

THE WAY BENEFITS ARE COMPUTED NOW:

Overview

Limitations

Step 1 - Find The Normal Retirement Age

Step 2 - Calculate The Average Indexed Monthly Earnings

Step 3 - Calculate The PIA

Step 4 - Retirement Benefits For A Spouse

Current Year Wage & Benefits Maximums

Senior's Earning Limit Repealed

The AIME is earnings indexed for inflation for a specific number of years divided by the number of months in those years. The number of years is generally 35, but it may be less depending on the date of birth. The earnings used in this calculation are earnings which are subject to Social Security tax. Therefore, annual earnings used in this calculation cannot exceed the maximum earnings subject to Social Security tax for a given year. A specific year's wages is then adjusted for inflation by multiplying that year's Social Security earnings by the ratio of base year average wages divided by average wages for that specific year. The base year is the year in which the worker turns 60. Those average wages are published by the Social Security Administration. The inflation adjusted wages for the best 35 years are totaled. The 35 years chosen do not have to be consecutive. That wage total is then divided by 420 months (35 yrs x 12 months per year).

Some observations about the AIME calculations:

The wage inflation factor is revised each year by the Social Security Administration.
Since the maximum earnings subject to Social Security tax has increased at a faster pace than inflation, if the worker has worked more than 35 years, generally, the more current years earnings will be used for the AIME calculation.
If the worker or spouse has worked less than 35 years, that person will be penalized in that total indexed wages will be divided by 420 months even if that person worked fewer than 420 months.
If one is inclined to work past their 70th birthday, those earnings may help to increase Social Security benefits.