Social Security pays benefits based on your past income. All three Social Security divisions--retirement, disability and survivors--base the monthly annuity on the amount of money earned over years of work history. Social Security uses complex formulas with calculations over 35 years of work for retirement benefits. Disability and survivors benefits may use fewer years, depending on the age at the time of disability or death. You must have 10 years or 40 credits of work history for retirement benefits. You may have six credits or 1 1/2 years of work history in the last 3 years prior to disability or death and meet qualifications. The maximum Social Security benefit at full retirement age in 2011 is $2,366 a month.
If you have 35 years of work history, Social Security uses them all to calculate your retirement benefits. If you have less than 35 years, it adds zeros to make up 35 years. Social Security formulas index each year’s income to present-day value so your income from the 1980s takes inflation into account. Social Security provides the indexing figures for each year and a worksheet if you want to calculate your benefits manually. The final calculation is your primary insurance amount. The PIA is 100 percent of your benefit at full retirement age. If you take early retirement, you receive less. Late retirement will give you more than the PIA.
Each year, Social Security taxes have a maximum contribution. If you make more than $106,800 in 2011, you contribute the maximum taxes to Social Security. The actual tax amount is $4,485.60 for 2011. In 1980, the maximum contribution base was $25,900; in 1990, it was $51,300. If you contributed the maximum for 35 years of work history, your PIA works out to $2,366 in 2011.
Adjustments to PIA
If you retire at 62 and full retirement age for you is 66 (born between 1943 and 1954), you receive 25 percent less than the PIA, or the amount you would receive if you wait until age 66. If you choose to wait until age 70, you receive 130 percent of PIA. If you receive the maximum of $2,366 a month for your Social Security annuity, your spouse may receive 50 percent of that amount at full retirement age, or nearly $1,200 based on your work history. This makes the maximum monthly income from Social Security about $3,500 for a worker and spouse. Social Security may increase this figure with a cost-of-living adjustment if the inflation rate warrants it, so the potential exists to receive more than this amount.
Social Security Statement
Each year, Social Security mails a statement to the home address of workers over age 25. This statement contains an estimate of retirement benefits based on earned income records up to about two years prior. The retirement figure bases calculations on estimated earnings into the future. Disability figures estimate disability income based on you stopping work at that time, so that figure is less than your estimated retirement figure.
Linda Richard has been a legal writer and antiques appraiser for more than 25 years, and has been writing online for more than 12 years. Richard holds a bachelor's degree in English and business administration. She has operated a small business for more than 20 years. She and her husband enjoy remodeling old houses and are currently working on a 1970s home.