What Are Social Security Benefits Based On?

The majority of the American public works years for Social Security retirement benefits to cover about 40 percent of retirement needs. Payment into Social Security is not always required, since a spouse may collect retirement benefits on the other spouse’s entitlement. The complexities of Social Security regulations and constant changes encourage questioning as to how benefit calculations are made.


Tough times in America brought about Social Security as part of the Franklin Roosevelt New Deal in 1935. The Great Depression affected elderly and disabled Americans, and Social Security legislation was to assure protection for these groups in the future. Social Security is a social program, not a trust. Funds you contribute today cover retirement for someone else.


Social Security retirement benefits make the quality of life better for millions of Americans--34 million in August 2010. The average monthly benefit was $1,171.60 for retired workers that month. The highest possible benefit for a wage earner was $2,346 in 2010, according to the Social Security website. Whether a part, or all, of a retiree’s income, Social Security retirement benefits are significant.


Social Security bases benefits on 10 years or 40 quarters of employment, over a period of 35 years. The highest earning years are used. Social Security arrives at an average indexed monthly earnings figure (AIME). It applies a formula to the AIME to arrive at the primary insurance amount or PIA. The PIA is the basis for payment of benefits, and it is the amount a worker would receive at full retirement age. Full retirement age is determined by birth date, and in 2010, full retirement age was 66 or 67, after years of calculations based on age 65.


Social Security reduces the PIA for early retirement and increases this figure for late retirement. A person retiring in 2010 at age 62 would receive 75 percent of the calculated PIA. This is a loss of 25 percent over a lifetime past age 62. Retirement past full-retirement age of 66 or 67 increases the PIA about 8 percent a year, so the retiree would receive 108 percent of the PIA at a year after full retirement age.


Americans can take Social Security early retirement and still work for income. Actually, the early-retired worker can make as much as $14,160 in 2010 without penalty from the Social Security Administration. A worker can retire at full retirement age with full Social Security PIA and make any amount of income without penalty from Social Security. The retiree will pay federal income taxes on income and maybe on some of the Social Security income, if he chooses early retirement. The maximum federal taxation on Social Security covers 85 percent of benefits, so the Internal Revenue Service never taxes all Social Security benefits collected.