The tens of millions of retirees who receive Social Security receive benefits based on their employment history. The longer you work and the more you earn, the greater your Social Security check is likely to be when you retire.
The calculations required to determine the exact amount of your monthly Social Security benefit are complicated. However, by making some assumptions, you can get a good idea of what every $1,000 you earn means for the Social Security benefits you’ll eventually receive.
How Social Security determines your monthly checks
The process the Social Security Administration (SSA) goes through to find out how much you receive from the program involves a few steps. First, the SSA goes over your work record, adjusts your annual compensation to account for inflation, and picks out the 35 years when that adjusted earnings were the highest. Second, it adds up the earnings numbers and divides by 420 — the number of months in 35 years — to calculate your Average Indexed Monthly Earnings (AIME).
The next step is to take your AIME and run it through a formula specific to your year of birth to determine your primary insurance amount (PIA). For example, the PIA for those who turn 62 in 2022 equals 90% of the first $1,024 in average indexed monthly earnings, plus 32% of the amount of AIME between $1,024 and $6,172, plus 15% of any amount above $6,172.
The PIA states what you can expect from your monthly state pension if you claim your Social Security at full retirement age, which is 67 for those who turn 62 in 2022. Claim earlier than full retirement age, and your monthly payments will decrease by as much as 30%. Delay them to age 70 and you can get 24% more on your monthly Social Security check.
Earnings in three stages of your career
When you earn $1,000 in a given year, you may increase your average indexed monthly earnings by $1,000 divided by 420, or about $2.38. But because of how the primary insurance amount formula works, the amount of benefits that becomes $2.38 will vary over the course of your career.
When you first get started, every dollar you earn goes to your AIME to reach the 90% threshold in the PIA formula. For example, based on the 2022 PIA brackets, for all your lifetime earnings on an indexed basis up to about $430,000, every $1,000 you earn adds about $2.14 to your PIA. That translates directly to what you can expect to see in your Social Security check at full retirement age.
But later on, the added benefits of every additional $1,000 in revenue drop. Again using the 2022 numbers, when your total earnings exceed $430,000, the contribution to your PIA will drop to 32%. That means every $1,000 earned adds only $0.76 to your PIA.
High earners may see the impact of more income shrink even further. If your total earnings based on 2022 figures are about $2.59 million, you’re in the 15% contribution range. That will further reduce the impact of each additional $1,000 you earn on your PIA to about $0.36.
Finally, whatever decision you make about when to claim Social Security will affect it. For example, if you expect to claim at 62 instead of 67, you can reduce those $2.14, $0.76, and $0.36 per $1,000 numbers by 30% to $1.50, $0.53, and $0.53, respectively. $0.25. However, if you plan to wait, add 24% and you get $2.65, $0.94, and $0.45.
What can you expect from social security
These numbers change from year to year. Younger people can expect more of their earnings to stay in the 90% portion of the PIA formula, allowing them to earn more in their careers before returning to lower percentages.
The lesson here, as with many things related to retirement, is that every step you take in your career will gradually add to your Social Security benefits when you retire. Your progress may seem small right now, but if you stay determined, it will eventually grow into a major part of your financial security when you retire.