What Is Average Indexed Monthly Earnings?
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. AIME works by taking into consideration the 35 years that exhibited an individual's top earnings, all the way up to the age of 60, for that person. AIME then indexes those top earning years to factor in wage growth, before calculating an average monthly figure. Simply stated, AIME essentially attempts to approximate a lifetime of earnings, using today's wage levels as a benchmark.
Average Indexed Monthly Earnings Explained
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% 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 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 turns 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.