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Social Security - III. How Benefits Are Calculated



III. How benefits are calculated
Social Security benefits are based on lifetime earnings of a covered worker. Actual earnings are adjusted to account for changes in average wages since the earnings were received.

  • Average indexed monthly earnings - Calculated for the 35 years in which a worker earned the most. A formula is applied to these earnings to arrive at a basic benefit amount.
  • Primary insurance amount (PIA) - This is how much a worker would receive at full retirement age.


IV. Working after retirement

Work after full retirement age
Recipients of Social Security retirement benefits who have reached full retirement age can work and still collect those benefits. Earnings in or after the month of reaching full retirement age will not reduce Social Security benefits at all.

Work before full retirement age
Individuals who opted to collect Social Security retirement benefits before reaching full retirement age will have their benefits reduced for earnings exceeding certain limits for the months before they reach full retirement age.

Recipients of Social Security retirement benefits who have not yet reached full retirement age will have their benefits reduced for earnings that exceed certain monthly limits. There is no reduction beginning in the month in which they reach full retirement age.
  • Reduction levels
    • $1 in benefits deducted for each $2 in earnings above the annual limit. In 2007, the limit is $12,960.
    • In the year of reaching full retirement age, $1 in benefits for each $3 in earnings over a different annual limit, $34,440 in 2007. This reduction ceases in the month full retirement age is attained.
V. Taxation of benefits

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