What is 'Average Indexed Monthly Earnings (AIME)'

Average indexed monthly earnings (AIME) is a calculation used to determine the primary insurance amount (PIA), which is used to value an individual's social security benefits. The average indexed monthly earnings takes the top 35 highest earning years up to age 60 and indexes it for wage growth, and then averages it to get a monthly amount. The AIME tries to approximate earnings over a lifetime at today's wage levels.

BREAKING DOWN 'Average Indexed Monthly Earnings (AIME)'

In order to calculate the PIA, the average indexed monthly earnings (AIME) is split into three parts. Predetermined percentages are applied to each part, and they are all summed together to get the PIA. If someone receives Social Security benefits, the number they use to calculate that benefit is from the primary insurance amount (PIA).

For example, suppose a person's AIME is $5,000. The PIA calculation would take 90 percent from the first $744, then 32 percent from earnings over $744 but under $4,483, and lastly 15 percent of monthly earnings over $4,483. In this example PIA would be $1,943.63.

The Average Indexed Monthly Income (AIME) Calculation

The Social Security administration uses the PIA calculation because of Title II of the Social Security Act, under the 1978 New Start Method. Each calendar year, each covered worker with wages up to the Social Security wage base (SSWB) is recorded. Making the calculation for Social Security benefits starts by looking at how long you worked and how much you made each year during your 35 highest earning years...

1. Start with a list of your earnings each year. Earnings history is shown on a Social Security statement, which is available online. Only earnings below a specified annual limit are included. This annual limit of included wages is called the contribution and benefit base.

2. Adjust each year of earnings for inflation. Social Security uses a two-step process called wage indexing to determine how to adjust earnings history for inflation.

  • Each year, Social Security publishes the national average wages for the year, a list that's available on National Average Wage Index page.
  • Wages are indexed to the average wages for the year someone turn 60. For each year, divide average wages of the indexing year (which is the year you turn 60) by average wages for the year being indexed. Then, multiply included earnings by this number.

For someone under age 62, the calculation will only be an estimate. Until average wages for the year someone turns 60 is known, there is no way to do an exact calculation. However, it is possible to attribute an assumed inflation rate to estimate the average wages.

3. Use the highest 35 years of indexed earnings to calculate monthly average. The Social Security benefits calculation uses the highest 35 years of someone's earnings to calculate their average monthly earnings. If someone doesn't have 35 years of earnings, a zero will be used in the calculation, which will lower the average. Total the highest 35 years of indexed earnings and divide this total by 420 (the number of months in a 35-year work history). The result is a person's AIME.

RELATED TERMS
  1. Indexed Earnings

    A worker's past wages that have been adjusted for changes in ...
  2. Wage Push Inflation

    Wage push inflation is a general increase in the cost of goods ...
  3. Taxable Wage Base

    Also known as the Social Security Wage Base, this base is the ...
  4. Social Security

    Social Security is a part of a social insurance and welfare program ...
  5. Outside Earnings

    Income that temporarily reduces a retired individual's Social ...
  6. Cash Wages

    Cash wages are compensation for employees that come in the form ...
Related Articles
  1. Retirement

    How Working After Retirement Affects Social Security

    Working after retirement can positively affect your Social Security benefits.
  2. Retirement

    3 Common Social Security Questions Answered

    Do you know how Social Security is calculated, when you should apply, and what rules have changed?
  3. Retirement

    Top 6 Myths About Social Security Benefits

    Misinformation on retirement benefits is common. We'll set the record straight.
  4. Retirement

    Delaying Social Security Can Add Up

    The age you start collecting Social Security benefits significantly affects how much you will get each month. Do the math before deciding when to file.
  5. Financial Advisor

    How Working Longer Impacts Social Security

    A look at the impact of working longer on Social Security retirement benefits.
  6. Retirement

    Social Security Strategy for Couples and Divorcees

    Those couples and divorcees born before 1954 can still take advantage of a Social Security loophole.
  7. Retirement

    Will the Social Security Cap Increase Help It Last Longer?

    The Social Security cap increase will be 7% in 2017, but even that may not be enough to keep Social Security from running out of funds.
  8. Retirement

    Introduction to Social Security

    You've probably contributed to this fund, but will you reap the benefits? Find out here.
  9. Retirement

    How Social Security for Legal Immigrants Works

    If you earn enough work credits in the U.S. – or combined with credits from certain other countries – you can claim benefits. Here is how.
  10. Insights

    Will You See Higher Wages In 2015?

    It's been a few years into the economic recovery from the Great Recession, and the employment picture has been rocky.
Hot Definitions
  1. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  2. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  3. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  4. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  5. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  6. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
Trading Center