A Factsheet from Social Security How Your Retirement Benefit is Figured U.S. Department of Health and Human Services Social Security Administration SSA Publication No. 05-10070 January 1994 ICN 467100 How Your Retirement Benefit Is Figured As you make financial plans for your future, one of the questions you'll probably ask is, How much will I get from Social Security? For most people, the answer can be found in a benefit estimate statement available free from Social Security. (You can call or visit any Social Security office to get the form you need to request this statement.) It tells you how much you can expect when you retire, and also provides estimates of the disability benefits you might be eligible for and any benefits payable to your family if you should die. While the benefit estimate statement is a helpful and useful tool, many people still wonder how their benefit is figured. This factsheet answers that question. Steps In Figuring A Social Security Retirement Benefit Social Security benefits are based on earnings averaged over most of a worker's lifetime. This is different from many other pension plans that are usually based on a relatively small number of years of earnings. Although a computer does all the work, the method for figuring retirement bene- fits goes like this. (Disability and survivor benefits are figured a little bit differently.) Step 1 First, your earnings covered by Social Security are listed starting with 1951. Step 2 Next, your earnings are adjusted for changes in average wages over the years. For example, average earnings for 1992 are five times greater than average earnings were for 1964. To make 1964 earnings comparable with current earnings, they are multiplied by five. Earnings are adjusted for each year up to the year you reach age 60. The adjustment factor becomes smaller the closer you get to the present. After you reach age 60, actual earnings are used. Step 3 From this list, the highest years of earnings are selected to figure your benefit. For nearly everyone retiring now and in the future, 35 years of earnings are used to figure retirement benefits. If you haven't worked for 35 years, we'll add years of zero earnings to your record to total 35 years. Step 4 The earnings for these years are totaled and divided by 420 (the number of months in 35 years) to get your average monthly earnings. This is the number used to figure your benefit rate. Step 5 A three-level formula is applied to your average monthly earnings to arrive at an actual benefit rate. For example, for people born in 1932: We multiply the first $422 of your monthly earnings by 90 percent. We multiply the next $2,123 of your earnings by 32 percent. We multiply any remaining amount by 15 percent. The results are added together and rounded to the next lower dime. This is your basic full retirement age (currently 65) benefit rate. A new formula is set each year for people reaching 62 that year. The percentages remain the same, but the dollar amounts change. Even if you don't retire until later, we'll figure your benefits using the formula based on the year you turned 62. We don't use this formula if you also get or are eligible for a pension based on work usually a government job where you didn't pay Social Security taxes. For more information about this, ask for a copy of A Pension From Work Not Covered By Social Security, (Publication No. 05-10045). Cost-Of-Living Increases You're eligible for cost-of-living benefit increases starting with the year you become 62. This is true even if you don't get benefits until 65 or even 70. This means your basic benefit is multiplied by all of the cost-of-living increases starting with the year you reach 62 up to the year you start getting benefits. Social Security benefits are paid in even dollar amounts, so your benefit is reduced to the next lower dollar. Reduced Benefits We told you how your full retirement benefit (the amount payable at 65) is figured. You can start getting benefits as early as 62, but at a reduced rate. Your benefit is reduced by five-ninths of one percent for each month you get benefits before 65. This amounts to a 20-percent reduction if you get benefits at 62. But, since benefits can be paid only for months you are eligible throughout the entire month, you can't get a benefit for the month you reach 62 unless your birthday is the first or second of the month. So, chances are your benefit won't be reduced the whole 20 percent. The closer you are to 65 when benefits start, the smaller the reduction. For example, the reduction is 13 percent at 63, and 6 percent at 64. Any Questions? You can get more information 24 hours a day by calling Social Security's toll-free number, 1-800-772-1213. You can speak to a service representative between the hours of 7 a.m. and 7 p.m. on business days. If you have a push-button (tone) phone, recorded information and services are available after 7 p.m. weekdays and all day on weekends and holidays. Hearing-impaired callers using TDD equipment can reach Social Security between 7 a.m. and 7 p.m. on business days by calling 1-800-325-0778. If you want to speak to a representative, the best times to call are early in the morning and early in the evening. And if you can, it's best to call later in the week and later in the month. When you call, have your Social Security number handy. The Social Security Administration treats all calls confidentially whether they're made to our toll-free numbers or to one of our local offices. We also want to ensure that you receive accurate and courteous service. That is why we have a second Social Security representative monitor some incoming and outgoing telephone calls.