Wednesday, June 15, 2022

# How Is Social Security Pension Calculated

## How Social Security Is Calculated

How Social Security Retirement Benefits Are Calculated [3 Easy Steps]

The benefits you receive under Social Security differ based on several factors, not least of which include your work history, your collection status, and which type of benefit you collect. Note that, despite the language of retirement, this is the same formula used to calculate SSDI benefits.

As a result, the average disability benefit is less than the average retirement benefit as few disabled workers have as many eligibility years as long as their retired counterparts.

Base benefits are calculated as follows:

## List Each Year’s Earnings

Your earnings history is shown on your Social Security statement, which you can now obtain;online.

In the table below, sample earnings for a hypothetical worker born in 1953 are shown in Column C. Only earnings;below;a specified annual limit are included. This annual limit of included wages is called the;”Contribution and Benefit Base“;and is shown as Max Earnings in Column H in the table.

## Change To The Taxation Of Social Security Pensions Received From Germany By A Resident Of Canada

Canada has an Income Tax Agreement with the Federal Republic of Germany, which entered into force on March 28, 2002.

Subparagraph;3 of Article 18 of the Agreement provides that benefits under the social security legislation of one country that are paid to a resident of the other country, may be taxed in the country of residence. However, the benefits can only be taxed to the extent they would have been taxable if the individual was resident in the first country. This means that the same amount of social security pension payments that would have been included in income if the individual had been a resident of Germany will be included in income in Canada.

## Social Security Calculation Step 3: Primary Insurance Amount Calculation

Now youre ready to determine the heart of your benefit; your primary insurance amount . The PIA is simply the result of your benefit calculation and is generally your full retirement age benefit amount.

This is calculation is accomplished by using the bend point formula thats in effect for the year you attain age 62. If you arent 62 yet, youll need to forecast what the bend point formula amounts will be in the year you turn 62. These change annually based on the change in annual wages and generally increase at 3-4%.

There are two numbers that make up this formula which are separated into three separate bands: The amount up to the first number, the amount between the first and second number, and the amount above the second number.

• For earnings that fall within the first band, you multiply by 90%. That is the first part of your benefit.
• For earnings that fall within the second band, you multiply by 32%. That is the second part of your benefit.
• For earnings that are greater than the maximum of the second band, you multiply by 15%. This is the third part of your benefit.
• The sum of these three bands is your benefit amount at full retirement age: your PIA, or Full Retirement Age benefit amount.

In the example image below we illustrate an individual with an AIME of \$6,000 being applied to the bend point formula.

## There Are Social Security Benefits For Surviving Spouses And Children

If your spouse dies before you, you can take a Social Security survivor benefit, but not in addition to your own benefit. You must choose one or the other. If you are at full retirement age, that benefit is worth 100% of what your spouse was receiving at the time of his or her death .

A widow or widower can start taking a survivor benefit at age 60, but the benefit will be reduced because it’s taken before full retirement age. If you remarry before age 60, you cannot get a survivor benefit. But if you remarry after age 60, you may be eligible to receive a survivor benefit based on your former spouse’s earnings record.

Eligible children who are under age 18 or were disabled before age 22 can also receive a Social Security survivor benefit, worth up to 75% of the deceased’s benefit.

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## How Much Will My Social Security Be Taxed If Im Married

• If the resulting number is less than \$32,000 , you dont have to pay taxes on your benefits.
• If the number is between \$32,000 and \$44,000, you may have to pay income tax on up to 50% of your benefits.
• If the number is more than \$44,000, up to 85% of your benefits may be taxable.

In addition,;the following states;also impose a tax on Social Security in some cases: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, North Dakota, Vermont, Utah and West Virginia. Contact your state tax agency for more details.

Unlike with many Social Security matters, your age doesnt matter when it comes to paying taxes on your benefits.

For everything you need to know on Social Security and taxes, we recommend;reading more here.

## Understanding The Social Security Benefits Formula Is Important

Understanding the Social Security benefit formula is important, because you can shape your behavior to increase your benefits once you know the formula.

Throughout your career, you can work to increase your income so you have a higher average wage. If you have not worked for a full 35 years, you may also decide to work longer so you don’t have any years of \$0 wages factored in or so you have fewer \$0s figured in your average. Or, if you are earning a much higher wage at the end of your career, you could stay in the workforce longer so some years of higher wages replace years of lower earnings. Finally, you could opt not to claim benefits until at least full retirement age or later so you get at least your primary insurance amount — or more. ;

Since Social Security is such an important source of income in retirement, it’s worth learning how the Social Security benefits formula works and taking steps to maximize the benefits that will help support you as a senior.

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## Spousal Benefits For Widows And Widowers

A widow or widower can receive up to 100% of a spouse’s benefit amount. That’s if the survivor has reached full retirement age at the time of the application.

The payment is reduced to somewhere between 71% and 99% of the deceased’s entitlement if the widowed person is at least 60 but under full retirement age.

Disabled people can apply as early as age 50. The agency has a streamlined application process to avoid delays in the first payment.

You may be eligible for benefits even if your spouse died long before reaching retirement age. Every employee racks up annual Social Security “credits” for working. If your spouse earned credits for at least 10 years, a spousal benefit has been earned.

It’s important to note that it pays to hold off until you reach your “full” retirement age to maximize the amount you will receive.

Also, if you are receiving spousal benefits and your spouse dies, you need to notify Social Security. Your spousal benefit of 50% of your partner’s benefit will convert to a survivor benefit of 100%.

And do it promptly. It’s not usually retroactive.

## What Does Aarps Social Security Benefits Calculator Do

Social Security Retirement – How Your Benefits Are Calculated

The calculator provides an estimate of your Social Security benefits, based on your earnings history and age. Our tool also helps you see what percentage of daily expenses your payments can cover, and how you can increase your benefits by waiting to collect. It can also tell you how your retirement earnings will be affected if you keep working after you claim your Social Security benefit.

Also Check: Can You Get Disability If You Are On Social Security

## How To Calculate Spousal Social Security Benefits If You Are Married

Spousal benefits are based on your spouses earnings and when you claim.

The Social Security Administration first pays out benefits on your own earnings record .;

It then calculates half of your spouses PIA and adjusts it based on when you claim benefits. Note that spousal benefits are only based on your spouses PIA and your age when claiming them.;That means that the amount you get is not affected by whether they claim their own benefits before or after full retirement age. Moreover, any benefits you receive as a spouse wont decrease your spouses retirement benefit.

If your earned benefit is more than half of what your spouse earned, it is unlikely you will receive spousal benefits.;You will only receive your own earned benefit.

You can claim spousal benefits;between age 62 and your Full Retirement Age. There used to be a loophole where a couple could file for earned benefits and spousal benefits separately, but Congress closed that for anyone born after 1953. Now when you file for benefits, you have to file for all benefits you are entitled to . That means that if you file for your spousal benefit, you have to file for your earned benefit at the same time, and vice versa. However, there are numerous strategies you can consider when trying to maximize your benefits as a married couple.

## Myth #4: Your Benefits Are Based Only On Wages You’ve Earned Before Age 65

How your Social Security benefit is calculated can seem mysterious. However, it’s important to know a few essential facts to aid your claiming strategy. You can use the tools on SSA.gov to do the calculations.

• Your benefit is calculated based on your highest 35 years of earnings; they don’t have to be consecutive years or before age 65.
• If you work past age 65, those earning years will be included, so long as they are high enough to be part of your highest 35 years.
• Even working part-time after turning 65 may be part of your highest 35 years of earnings.
• To be eligible for Social Security, you must have a minimum of 10 years of covered employment , which equates to 40 credits in the Social Security system.
• If you don’t have 35 years with earnings, zeros will be included in the calculation.

Read Viewpoints on Fidelity.com: Social Security tips for working retirees

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## Social Security Calculation Example

Take someone who turned 62 in 2018. He has worked since he was 32 and each year earned an inflation-adjusted income of \$60,000. His AIME would be:

• \$80,000 x 30 + \$0 x 5 = \$2,400,000
• \$2,400,000 / 35 = \$68,571
• \$68,571 / 12 = \$5,714

Since our sample recipient has turned 62 this year, benefits will be fixed to the 2018 bend points even if he doesn’t retire until 67. His PIA would therefore be:

• 90% x \$895 = 805.50, +
• 32% x = \$1,440.64 +
• 15% x = \$47.55
• Added together for a total monthly benefit of \$2,293.60

## When You Choose To Start Taking Social Security Benefits

The yearand even the month within that yearthat you choose to begin taking Social Security benefits affects how much you receive each month. You can start claiming Social Security benefits early as age 62, the current early retirement age. But you wont get your full PIA. Itll be reduced based on how many months you have until your full retirement age. This reduction can really add up, topping in at as high as 30% for particularly early claimers.

You can avoid these surcharges on your PIA, of course, simply by waiting to start payments until your full retirement age. This is generally between ages 66 and 67, depending on when you were born.

You can even add onto your base amount by delaying when you start benefits. After you reach full retirement age, you can boost your benefits by up to 8% of your PIA annually simply by not claiming Social Security. These benefit increases are known as delayed retirement credits, and you can accrue them up to age 70.

An important note: These benefit rate changes are performed to provide roughly the same cumulative benefit over a lifetime, assuming a roughly average lifespan. In other words, if you start Social Security earlier, youll probably claim it for longer; someone with the same lifespan who delayed payments would claim them for less time. To provide them the same total benefit, earlier payments must be smaller and later benefits have to be larger to catch up.

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## Estimated Net Benefits Under Differing Circumstances

In 2004, Urban Institute economists C. Eugene Steuerle and Adam Carasso created a Web-based Social Security benefits calculator. Using this calculator it is possible to estimate net Social Security benefits for different types of recipients. In the book Democrats and Republicans âRhetoric and Reality Joseph Fried used the calculator to create graphical depictions of the estimated net benefits of men and women who were at different wage levels, single and married , and retiring in different years. These graphs vividly show that generalizations about Social Security benefits may be of little predictive value for any given worker, due to the wide disparity of net benefits for people at different income levels and in different demographic groups. For example, the graph below shows the impact of wage level and retirement date on a male worker. As income goes up, net benefits get smaller âeven negative.

However, the impact is much greater for the future retiree than for the current retiree . The male earning \$95,000 per year and retiring in 2045 is estimated to lose over \$200,000 by participating in the Social Security system.

The next image shows estimated net benefits for married men and women at different wage levels. In this particular scenario it is assumed that the spouse has little or no earnings and, thus, will be entitled to collect a spousal retirement benefit. According to Fried:

The earliest you can claim spousal benefits is 62but how early you claim plays an important role in maximizing your benefits. If you claim before you reach your;full retirement age, you will permanently lower your monthly benefit and even your survivor benefit.

While the;Bipartisan Budget Act of 2015;ended some of the strategizing around spousal benefits, but there are still ways to maximize your spousal benefits:

• If you were born before Jan. 2, 1954, and havent claimed your own benefits yet, you are still able to take advantage of the loophole. You can file a restricted application for spousal benefits at your full retirement age. For this to work, your spouse must have already filed for their benefits. This strategy would let you start receiving spousal benefits, while delaying taking your earned benefits, causing them to grow. When you turn 70, you would then switch to those earned benefits .
• If you were born on Jan. 2, 1954 or later, and you are married, the higher earning spouse may consider delaying claiming their benefits until age 70 to increase the benefit with delayed retirement credits. Keep in mind, this would mean delaying when;you;can take your own spousal benefits, thus missing out a few years of those payments.
• If youre divorced, youll get the maximum spousal benefit, 50%, if you wait to reach your full retirement age. But you have the advantage of not needing to wait for your ex to file for his or her own benefits;first.

## How Is Social Security Calculated

There is a three-step process used to calculate the amount of Social Security benefits you will receive.

Step 1:;Use your earnings history to calculate your;Average Indexed Monthly Earnings .Step 2:;Use your AIME to calculate your;primary insurance amount .Step 3:;Use your PIA, and adjust it for the age when you will begin receiving benefits.

You can use a copy of your Social Security statement that provides your earnings history to plug your own numbers into the formulas below.

## How Your Social Security Benefits Are Calculated

Best Social Security Retirement Calculator I’ve Seen…Yet (2018)

Your Social Security benefits are based on the 35 calendar years in which you earned the most money. If you have fewer than 35 years of earnings, each year with no earnings will be factored in at zero. You can increase your Social Security benefit at any time by replacing a zero or low-income year with a higher-income year.

There is a maximum Social Security benefit amount you can receive, though it depends on the age you retire. For someone at full retirement age in 2021, the maximum monthly benefit is \$3,113. For someone filing at age 70, the maximum monthly amount is \$3,895.

You can estimate your own benefit by using Social Security’s online Retirement Estimator.

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## Strategy For Widowed Spouses

Widows and widowers may receive full benefits at their full retirement age or reduced benefits as early as age 60, as explained in sections above. Remarrying after age 60 will not affect your eligibility for survivors benefits. However, it may be more convenient for you to forego your widow or widower spousal benefits depending on your circumstances.

If your current spouse is also eligible for Social Security benefits and earns more than your former spouse, you may wish to apply for spousal benefits based on your new spouses record instead.

If you are collecting a survivors benefit, but also qualify for a benefit on your own, you may wish to collect a survivors benefit in the early years of retirement and leave your own Social Security benefits to accrue delayed retirement credits. Then, you can switch to your own retirement benefit as late as age 70.