Key takeaways

  • Social Security retirement benefits are calculated using a worker’s 35 highest-earning years. The Social Security Administration indexes each year’s earnings to account for wage growth, then averages the 35 highest years to produce the key number that drives the benefit formula.
  • Workers with fewer than 35 years of covered earnings receive zeros for the missing years. Those zeros are averaged into the calculation, reducing the benefit amount for anyone who spent years outside the paid workforce.
  • The benefit formula is progressive. Lower earners receive a higher percentage of their average monthly earnings as a benefit than higher earners, by design. The formula applies three different rates to three portions of average monthly earnings using fixed dollar thresholds called bend points.
  • Claiming Social Security before full retirement age permanently reduces the benefit. Workers born in 1960 or later who claim at age 62 (the earliest anyone can start pulling on benefits) receive 30 percent less than their full benefit amount for the rest of their lives, per the SSA.
  • The Social Security Fairness Act, signed January 5, 2025, eliminated two provisions that had reduced benefits for millions of public-sector workers. The Windfall Elimination Provision and the Government Pension Offset no longer apply, retroactive to January 2024, per the SSA.
  • Use this Social Security calculator to estimate monthly benefits. 

Most people know that Social Security retirement benefits are tied to how long and how much a person worked. Fewer know the precise mechanics behind the number that appears on their annual statement. The calculation is more structured than it might appear. Understanding it helps explain why two people who worked for the same number of years can receive very different monthly amounts.

The Social Security Administration (SSA) computes retirement benefits using a formula that begins with a worker’s earnings history. It applies several adjustments before arriving at a monthly benefit figure. The process involves three sequential steps: indexing past earnings for wage growth, calculating an average of the highest 35 years, and applying a progressive benefit formula to that average.

The SSA’s role

The SSA administers the Old-Age, Survivors, and Disability Insurance program, or OASDI, the program that funds Social Security retirement benefits. Workers contribute to OASDI through the Federal Insurance Contributions Act, or FICA, payroll tax, which in 2026 is 6.2 percent on earnings up to the taxable maximum of $184,500, per the SSA’s 2026 COLA fact sheet. Employers match that contribution. Self-employed workers pay the combined 12.4 percent rate.

Each dollar contributed is tracked through the worker’s Social Security record. That record can be viewed through a free mySocialSecurity account at ssa.gov. It forms the foundation of the benefit calculation.

Graphic by Kate Farley

Understanding AIME

The first step in the benefit calculation is determining the Average Indexed Monthly Earnings, or AIME. This figure represents the average of a worker’s highest 35 years of earnings, adjusted for wage growth.

Because a dollar earned in 1990 purchased more than a dollar earned today, the SSA does not compare raw earnings amounts across decades. Earnings from years before the worker turned 60 are multiplied by an indexing factor based on the National Average Wage Index. This brings older earnings forward to near-current wage levels. Earnings from age 60 onward are counted at their actual nominal amount.

Once all years of earnings are indexed, the SSA selects the 35 highest-earning years, adds them together, and divides by 420 months, the number of months in 35 years. The result is the AIME, expressed as a monthly dollar figure.

Workers with fewer than 35 years of covered earnings receive a zero for each missing year, and those zeros reduce the final average. The SSA always divides by 420 months (35 years × 12) regardless of how many years were actually worked, so missing years don’t shrink the denominator; they just contribute nothing to the numerator.

Consider this example:

Worker A worked all 35 years, accumulating $4,200,000 in total indexed earnings. Dividing by 420 produces an AIME of $10,000.

Worker B left the workforce for 10 years (perhaps to raise children or manage a family health crisis) and has only 25 years of covered earnings totaling $3,150,000. The SSA fills the 10 missing years with zeros and still divides by 420, producing an AIME of $7,500.

That $2,500 monthly AIME gap is entirely a function of the zeros in the numerator. Worker B didn’t earn less per year while working. In fact, both workers may have had nearly identical salaries during their working years. The difference is simply that Worker B has 10 years contributing nothing to the average.

At the bend points, that AIME difference translates into a meaningfully lower monthly benefit, and because Social Security adjustments are permanent and cumulative, the gap compounds over a retirement that may span 20 to 30 years.

The 35-year average

The practical implication of the 35-year structure is that each additional year of earnings can replace a lower-earning year or a zero year in the calculation. Working a 36th, 37th, or 38th year does not add years to the denominator. It can only improve the average by displacing weaker years, per the SSA’s benefit calculation documentation.

The SSA reviews each beneficiary’s earnings record annually. If a worker’s most recent year of earnings is higher than one of the 35 years already in the calculation, the SSA recalculates the benefit. This applies to people who are already receiving benefits. Any increase is paid retroactively to January of the year following the year the earnings were recorded, per SSA guidance on working while receiving benefits.

The zero-year effect is most significant for workers who took time away from paid employment, whether for caregiving, education, disability, or other reasons. Each additional year of covered earnings after returning to work has the potential to displace a zero and raise the AIME.

Graphic by Kate Farley

How the PIA formula works

Once the AIME is calculated, the SSA applies a progressive formula to determine the Primary Insurance Amount, or PIA, the monthly benefit a worker receives if they claim at exactly their full retirement age (FRA). For anyone born in 1960 or later, FRA is 67.

Before getting into the formula itself, it helps to understand why age 62 keeps appearing even when FRA is 67. Age 62 is simply the earliest age at which anyone can claim Social Security, but it also plays another role that has nothing to do with when someone actually retires. 

The SSA uses the year someone turns 62 as the reference point for locking in certain calculations, even if they plan to keep working and don’t claim until 67 or later. Think of it as the year the benefit formula gets calibrated. What happens at 62 is administrative, not a decision they have to make.

The formula itself works by dividing each person’s AIME into three segments using dollar thresholds called bend points. Each segment of their AIME is credited at a different rate; the first dollars of average earnings are replaced at a higher rate, and progressively higher earnings are replaced at lower rates. This is what makes Social Security progressive: it replaces a larger share of lower earners’ lifetime earnings than higher earners’.

The specific bend points that apply to a person are those published for the year they turn 62, and they are fixed from that point forward. For workers born in 1964,  who turn 62 in 2026,  the bend points are $1,286 and $7,749. Even if they continue working or delay claiming until 67 or beyond, those same bend points apply to their PIA calculation.

The PIA formula applies:

  • 90 percent of the first $1,286 of AIME
  • 32 percent of AIME between $1,286 and $7,749
  • 15 percent of AIME above $7,749

The results are added together and rounded down to the nearest 10 cents. 

To make the formula concrete with a worked example: A worker with an AIME of $3,000 would receive 90 percent of $1,286, which equals $1,157.40, plus 32 percent of the remaining $1,714, which equals $548.48, plus 15 percent of zero dollars above the second bend point, for a total PIA of $1,705.88, rounded down to $1,705.80. 

The 90 percent rate on the lowest portion is what makes the formula progressive: a worker with a very low AIME receives a higher percentage of their average earnings as a benefit than a high-earning worker does, per the Congressional Research Service analysis of the benefit formula.

So, the full Social Security calculation process in sequence goes as follows:

  1. Index all earnings years using the National Average Wage Index for years before age 60
  2. Select the 35 highest indexed earning years
  3. Add those years together and divide by 420 months to arrive at the AIME
  4. Apply the PIA formula using the bend points for the year the worker turns 62
  5. Round down to the nearest 10 cents to produce the PIA
  6. Adjust for claiming age relative to the FRA

Use this Social Security calculator to estimate monthly benefits. 

COLA and claiming age

The Cost-of-Living Adjustment, or COLA, is the annual percentage increase applied to Social Security benefits to preserve purchasing power against inflation. The SSA calculates COLA based on the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, from the third quarter of the prior year to the third quarter of the current year. For 2026, the SSA applied a COLA of 2.8 percent, affecting nearly 71 million beneficiaries beginning with January 2026 payments, per the SSA’s 2026 COLA fact sheet.

Once a PIA is calculated, the next major variable is simply when to start collecting: a person’s claiming age. Think of claiming age as the on/off switch for monthly benefits. The date someone flips that switch has a permanent effect on the size of every check they receive for the rest of their life.

As a reminder, the Full Retirement Age (FRA), the age at which they receive 100 percent of their calculated PIA, is 67 for anyone born in 1960 or later.

Age 62 is the earliest age the SSA allows anyone to begin collecting retirement benefits. Claiming before 67 is entirely voluntary, but it comes at a cost: the SSA reduces monthly benefits for every month they claim ahead of FRA, not just for full years. 

Claiming at exactly 62, the earliest possible, results in the maximum reduction of 30 percent. Claiming at 63 results in a smaller reduction, 64 is smaller still, and so on. Every month someone waits between 62 and 67 incrementally increases benefits. Claiming before age 62 is not permitted under current law, regardless of circumstance.

That 30 percent reduction for claiming at 62 is not a temporary penalty that expires or fades. It is baked into every payment for life. A worker whose PIA is $4,000 at FRA would receive $2,800 per month by claiming at 62, and that gap persists whether they live to 75 or 95.

COLA adjustments applied each year raise the check amount, but the 30 percent reduction remains baked in for the life of the claim. Conversely, delaying past FRA earns delayed retirement credits of 8 percent per year, up to age 70. The 2026 maximum monthly benefit for a worker retiring at FRA is $4,152, per the SSA. For a worker who delays until age 70, the maximum rises to $5,181.

The Social Security Fairness Act

For decades, two provisions significantly reduced or eliminated Social Security benefits for workers who also received pensions from jobs not covered by Social Security. These included teachers, police officers, firefighters, federal employees under the Civil Service Retirement System, and some workers covered by foreign social security systems.

First, the Windfall Elimination Provision, or WEP, used a modified PIA formula to reduce retirement and disability benefits for workers who had earned a non-covered pension alongside their Social Security entitlement. 

Second, the Government Pension Offset, or GPO, reduced or eliminated spousal and survivor benefits for the same group, often offsetting them by two-thirds of the pension amount.

On January 5, 2025, President Biden signed the Social Security Fairness Act into law, eliminating two provisions, the WEP and GPO, that had long reduced benefits for public sector workers, including many teachers, firefighters, and government employees. The elimination was made effective retroactively to January 2024, and the SSA distributed $17 billion in retroactive payments to more than 3.1 million affected beneficiaries by July 2025.

For most people whose benefits were previously reduced, no action is required. The SSA has been processing adjustments automatically and issuing back pay without requiring new applications.

However, if someone never applied for Social Security because WEP or GPO would have eliminated their benefit entirely, they may now be eligible and should apply. The SSA’s dedicated Fairness Act page at ssa.gov is the starting point, though navigating the SSA website can feel overwhelming if they haven’t used it before.

Unsure where to begin or want a guided walkthrough of exactly which pages to visit and what to expect at each step? We’ve put together a separate step-by-step guide with screenshots: A beginner’s guide to navigating the Social Security website. It’s built for someone who has never filed before and walks through the process from the homepage to submission.

Go Further: The SSA maintains a dedicated page tracking the implementation of the Social Security Fairness Act, including payment timelines, state-by-state breakdowns, and guidance for workers who had not previously applied for benefits. It is publicly accessible at ssa.gov/benefits/retirement/social-security-fairness-act.html.

FAQs

What happens if a worker has fewer than 35 years of Social Security-covered earnings? 

The SSA averages zeros into the AIME calculation for any years under 35. The effects are:

  • The numerator of the AIME calculation is lower because zero years contribute nothing
  • The denominator remains 420 months regardless of the years worked
  • The resulting AIME is lower than it would be with 35 years of actual earnings
  • Any additional year of covered employment displaces a zero year and raises the AIME

The effect is most pronounced for workers with large gaps in covered employment, per SSA benefit calculation documentation.

Are earnings above the taxable maximum counted in the Social Security benefit calculation? 

No. In any given year, earnings above the taxable maximum are not subject to Social Security payroll tax and are not included in the benefit calculation. In 2026, the taxable maximum is $184,500, per the SSA’s COLA fact sheet. Only earnings at or below that threshold in each year count toward the AIME.

Does working after claiming Social Security benefits affect the benefit amount? 

It can. The SSA reviews the earnings records of all beneficiaries each year. If a year of post-claim earnings is higher than one of the 35 years already in the calculation, the SSA recalculates the benefit and pays any resulting increase retroactively to January of the following year, per SSA guidance on working while receiving benefits. The increase is automatic. No new application is required.

Glossary

  • Average Indexed Monthly Earnings (AIME). The figure is produced by taking a worker’s 35 highest years of earnings, adjusting earlier years for wage growth using the National Average Wage Index, summing the 35 highest indexed amounts, and dividing by 420 months. The AIME is the primary input into the PIA formula.
  • Bend points. The dollar thresholds set annually by the SSA that divide a worker’s AIME into three segments for purposes of the PIA formula. Different percentages apply to each segment, producing the progressive structure of the benefit calculation. For workers turning 62 in 2026, the bend points are $1,286 and $7,749, per the Federal Register. They are fixed at the year the worker turns 62 and do not change thereafter.
  • Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The inflation index published by the Bureau of Labor Statistics that the SSA uses to calculate the annual Cost-of-Living Adjustment applied to Social Security benefits.
  • Cost-of-Living Adjustment (COLA). The annual percentage increase applied to Social Security benefits to preserve purchasing power against inflation, calculated by the SSA based on CPI-W data from the third quarter of the preceding year. The 2026 COLA was 2.8 percent.
  • Federal Insurance Contributions Act (FICA). The federal law that requires employees and employers to each pay 6.2 percent of wages toward Social Security, up to the annual taxable maximum, and 1.45 percent toward Medicare on all wages.
  • Full retirement age (FRA). The age at which a worker is entitled to 100 percent of their Primary Insurance Amount. For anyone born in 1960 or later, FRA is 67, per the SSA.
  • Government Pension Offset (GPO). A now-repealed provision that reduced or eliminated spousal and survivor Social Security benefits for workers who also received a pension from employment not covered by Social Security. Repealed by the Social Security Fairness Act, effective January 2024.
  • National Average Wage Index. An SSA measure of economy-wide wage levels used to index a worker’s historical earnings before calculating the AIME. Earnings before age 60 are multiplied by an indexing factor derived from this index.
  • Primary Insurance Amount (PIA). The monthly Social Security retirement benefit a worker receives if they claim at exactly their full retirement age. The PIA is calculated by applying the SSA’s progressive bend point formula to the AIME.
  • Social Security Fairness Act. Legislation signed January 5, 2025, that eliminated the Windfall Elimination Provision and the Government Pension Offset, effective for benefits beginning January 2024. Approximately 2.8 million public-sector workers and their survivors saw benefit increases as a result.
  • Taxable maximum. The annual earnings threshold above which wages are not subject to Social Security payroll tax and are not counted in the benefit calculation. In 2026, the taxable maximum is $184,500, per the SSA.
  • Windfall Elimination Provision (WEP). A now-repealed provision that used a modified PIA formula to reduce Social Security retirement and disability benefits for workers who also received a pension from employment not covered by Social Security. Repealed by the Social Security Fairness Act, effective January 2024.

Sources

Disclaimer: Steady Retire and MediaFeed are providers of educational content and information. This article is intended for informational and illustrative purposes only and does not constitute financial, legal, tax, or investment advice. The information provided does not create a professional-client relationship and should not be used as a substitute for consultation with a qualified financial advisor, tax professional, or attorney. While we strive to provide accurate and up-to-date information, rules and regulations regarding retirement are subject to change. Always consult with a certified professional regarding your specific financial situation.