Social Security benefits are intended to replace about 40% of the average worker’s pre-retirement income, but the exact amount depends on average lifetime earnings and age at which you file. The program pays out in a tiered manner, so lower-income workers are more likely to receive benefits in place of their pre-retirement income than higher-income workers.
Learn how Social Security payments are calculated and how the replacement rate changes among five hypothetical workers with different incomes.
How Social Security Retirement Benefits are Determined
Social Security benefits paid to retired workers are equal to the Principal Insurance Amount (PIA) adjusted to account for early retirement or retirement. We will explain how to calculate your retirement allowance in four steps.
- step 1: Adjust your annual income to account for wage inflation using the National Average Wage Index. This “indexing” ensures that Social Security benefits reflect improvements in living standards over time.
- Step 2: Select the 35 years during which the employee had the highest salary and convert the indexed earnings to a monthly average. This number is known as the Average Indexed Monthly Earnings (AIME) amount.
- Step 3: AIME runs through the Social Security benefit formula to determine PIA, which is the retirement benefit a worker receives at full retirement age (FRA).
- Step 4: We adjusted the PIA to account for early or delayed retirement. Workers who claim Social Security earlier than FRA receive permanently reduced benefits, and workers who delay Social Security beyond FRA receive permanently increased benefits. The minimum age to claim is when she is 62 years old, and delayed retirement benefits will stop accumulating when she is 70 years old.
In summary, Social Security retirement benefits paid to workers boil down to two questions: How much did the worker earn in her 35 years as the highest-paid member of her career? And at what age did the worker start collecting Social Security? With that in mind, it is important to note that income Let’s take a closer look at how it affects your benefit calculations.
Reemployment rates for retirees vary depending on average lifetime income
When the Social Security Administration studies replacement rates, it groups workers based on their average career earnings. This is an index of her average earnings over 35 years, the highest paid years of her career.
The career average earnings detailed below are expressed in $2023 and the threshold defines five hypothetical workers.
- Very low income workers: $15,867
- Low-income workers: $28,561
- Middle-income workers: $63,469
- High-income workers: $101,550
- Very high-income workers: $156,274
Assuming that Social Security starts at FRA, the replacement rates for the hypothetical workers above are 78% for very low-income workers, 57% for low-income workers, 42% for middle-income workers, and 42% for ordinary-income workers. It will be 35%. 28% for high-income and very high-income workers.
Details of the Social Security retirement benefits that will be paid to each of these hypothetical workers in 2023 are as follows:
- Very low income workers: $12,689 ($1,057 per month)
- Low-income workers: $16,623 ($1,385 per month)
- Middle-income workers: $27,466 ($2,289 per month)
- High-income workers: $36,283 ($3,024 per month)
- Very high-income workers: $44,357 ($3,696 per month)
Because age claims have a significant impact on benefits, keep in mind that early or delayed retirement can also have a significant impact on replacement rates. For example, if a worker born in 1960 (or later) claims Social Security when he is 62 years old, he will receive only 70% of his PIA, but if he delays Social Security until age 70, he will receive only 70% of his PIA. You will receive 124%.
The conclusion is: Social Security typically replaces about 40% of preretirement income on average, but the actual replacement rate for very low-income individuals can exceed 70% and is much lower for very high-income individuals. can be less than 30%. . In addition, differences in claimed ages can cause even greater dispersion in these numbers.
Current workers who are interested in an accurate estimate of their future Social Security benefits should: my social security Obtain an account through the Social Security Administration.