Social Security is the US’ national pension program. Social Security covers the vast majority of American workers, who pay into the program while employed in exchange for benefits when they become eligible. Remember, Social Security is not a substitute for retirement savings. It will likely not cover all of your expenses in retirement. It should be considered supplementary to, not a replacement of, your own retirement savings such as an IRA or 401k.
How is the benefit calculated?
While the calculation for an individual’s Social Security benefit is complex, the four main components are fairly common:
- The history of your earnings for each year you worked and paid into SS.
- Each year of your earnings are indexed to the average national wage.
- The indexed earnings for your 35 highest wage-earning years (including years for which you earned $0) are averaged.
- A set of formulas are applied to “level out the playing field” between high earners and low earners. In other words, those with high incomes receive proportionately less from SS than those with low incomes.
- What pops out is your benefit, or primary insurance amount. This is the amount you’ll be eligible to receive at your full retirement age. The Social Security Administration makes an annual statement available to you online that details your earnings history and expected benefits.
How can you find out what your benefits will be?
You can register at https://www.ssa.gov/ to see your estimated benefits (the projection assumes you will continue working until retirement age), earnings record, and more information about your benefits.
