Social Security - computing a Primary Insurance Amount

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A Primary Insurance Amount (PIA) is used to determine not only Social Security old-age benefits, but disability benefits and benefits as a wife, husband, ex-wife, ex-husband, widow, widower, widow of previously divorced husband (now deceased), widower of previously divorced wife (now deceased), the mother of a child of a deceased parent, father of a child of a deceased parent, the child of a deceased parent, as well as the parent of someone who is deceased.

Reason to know how to compute a PIA
Knowing how the Social Security Administration (SSA) computes the PIA allows you to understand what it is or even to compute it for yourself. Like doing long division, the process is not difficult, but it can seem tedious. For most cases, SSA uses the Average Indexed Monthly Earnings Method.

If one prefers to use off-the-shelf tools, or would like some examples when creating one's own spreadsheet, two publicly available spreadsheets are
 * The 'SocialSecurity' tab of the Personal finance toolbox
 * The Downloadable Social Security Benefit Estimator

There is also a web tool that includes explanations of calculation steps in its output:
 * Social Security Calculator

Given a PIA (or both PIAs for a couple), a web tool that helps evaluate SS benefit start dates is
 * Open Social Security: Free, Open-Source Social Security Calculator

Types of PIA computations
The following covers the PIA for someone who pays into the Social Security System and lives to age 62 without going on disability. There are other methods for those who become disabled, die before age 62, or who spend most of their career not covered by Social Security.

Steps
To start, you want to find the Average Indexed Monthly Earnings (AIME). Indexing refers to adjusting the covered earnings (earnings on which social security tax is paid) in a given year relative to the national average wage in the year you turn 60.

Given numbers:


 * Indexing year: the year turn 60
 * National Average Wage Index (NAWI) for indexing year, either known or estimated

First step: Use a spreadsheet to index the earnings and find the top 35 years


 * Column 1: Year, starting with first year that has covered earnings, e.g., 1974
 * Column 2: Covered earnings for year in column 1
 * Column 3: Covered earnings times NAWI for indexing year
 * Column 4: NAWI for year in column 1
 * Column 5: For years up to age 60: Column 3 divided by Column 4: covered earnings times NAWI for indexing year divided by NAWI for given year rounded to the cent.
 * Column 5: For years after age 60: covered earning
 * Column 6: Same as Column 5 if one of the highest 35 numbers in Column 5 (these are the top 35 indexed earnings); otherwise 0

Second step: Find the AIME


 * Add the top 35 indexed years in Column 6
 * Divide the result by 420, the number of months in 35 years
 * Round down to the nearest whole dollar
 * This is the Average Indexed Monthly Earnings

Third step: Find the bend points for the indexing year


 * 1st bend point: Multiply the NAWI for the indexing year by 180 and divide by 9,779.44, the NAWI for 1977, the base year. Round down to the dollar.
 * 2nd bend point: repeat replacing 180 by 1085.

Fourth step: Find the PIA


 * The PIA at eligibility (age 62) is the sum of a three‐part formula:
 * 90% of AIME up to and including the first bend point, plus
 * 32% of AIME from the first bend point to the second bend point, plus
 * 15% of AIME in excess of the second bend point.

Fifth step: Recompute the PIA using the same bend points if new covered earnings change the AIME (e.g., the top 35 years of earnings (indexed or not) have changed since age 62)

Sixth step: Apply cost of living increases from age 62 onward. The COLA is applied to the most recent PIA, then rounded down to the nearest dime. Repeat for any subsequent years.

Example
Born in 1954 (after 1/1). Turn 60 in 2014. National Average Wage Index (NAWI) for 2014 = 46,481.52.

First step (for an example year):


 * Col 1: Year 2000.
 * Col 2: Covered earnings = 70,000.
 * Col 3: 70,000 times 46,481.52 = 3,253,706.40
 * Col 4: NAWI for 2000 = 32,154.82
 * Col 5: 3,253,706.40 / 32,154.82 = 101,188.76

Second step:


 * Sum of top 35 years = 3,246,723.58 for example
 * AIME = 3,246,723.58 / 420 = 7,730.294 rounded down to 7,730

Third step:

Bend points for 2016 eligibility (indexing year 2014).


 * 1st bend point = 46481.52 times 180 divided by 9779.44 = 855.54 rounded to 856.
 * 2nd bend point = 46481.52 times 1085 divided by 9779.44 = 5156.99 rounded to 5157.

Fourth step:

Since the AIME of 7730 is greater than 5157, the PIA is

0.9 (856) + 0.32 (5157 - 856) + 0.15 (7730 - 5157) = 770.4 + 1376.32 + 385.95 = 2532.67 rounded down to the nearest dime = 2532.60. This is the PIA as of 2016, the year of eligibility.

Fifth step:

Assume covered earnings in 2016 do not change the AIME, but covered earnings in 2017 replace an earlier lower earning year and increase the AIME from 7,730 to 7,750.

Since the AIME of 7750 is greater than 5157, the PIA is

0.9 (856) + 0.32 (5157 - 856) + 0.15 (7750 - 5157) = 770.4 + 1376.32 + 388.95 = 2535.67 rounded down to the nearest dime = 2535.60. This is the recomputed year of eligibility PIA as of 2018 (includes earnings through 2017).

Sixth step:

The cost-of-living increases for 2016 and 2017 were 0.3% and 2.0%. Since the PIA after including the new earnings is 2535.60, multiplying by 1.003 gives 2543.21, which results in a new PIA 2543.20 when rounded down to nearest dime. Repeating with a COLA of 2.0 gives a value of 2594.06 which rounds down to 2594.00. This is the PIA as of 2018.

Find your benefit
With the PIA in hand (and perhaps the PIA of another person, say a husband or wife), benefit formulas (of which there are many) can be used to find a particular benefit. A good source for benefit formulas is the Code of Federal Regulations, Title 20 – Employees’ Benefits, Chapter III – Social Security Administration Part 404 – Federal Old-Age, Survivors and Disability Insurance (1950- ), Subpart D (link).