How Much Are the Benefits Payments?
Social Security applies a complex and multi-stage formula to calculate your benefit amount. Rather than trying to figure out the computation yourself, it is HIGHLY recommended that you contact the Social Security Administration. You can ask what your projected benefit amount would be based on certain assumptions, such as the alleged onset of disability (AOD). The Social Security website used to offer a benefits calculator. However, they have ended this on-line service because of budget cuts.
For those not faint of heart, or simply wanting a general idea of how the calculation is made, I offer the following description.
Step 1: Elapsed Years
According to Social Security Handbook sec. 704, you start by calculating the number of elapsed years. Calculating the number of elapsed years is a two part process. First, take the difference between your age at the time you become disabled and age 22. For example, if a person becomes disabled at age 48, then this first figure equals 48-22, or 26. Second, the Social Security formula says to subtract 5. Therefore, 26-5 = 21. This result is the number of elapsed years.
Step 2: Computation Years
After finding the number of elapsed years, you must then calculate the number of computation years. Reference for this calculation is found at Social Security Handbook sec. 703.2. We divide the number of elapsed years by 5, and drop off any remainder. In keeping with the above example, 21 / 5 = 4.2 (or just 4, since we drop off the remainder). We then subtract this result from the number of elapsed years. 21 – 5 = 16. Therefore, 16 is the number of computation years.
The above formula may seem strange. It’s not clear to me why Social Security uses this formula. An effect of this formula (and it may be an intended effect) is that if you have a few low earning years, those years do not reduce your benefit amount. The effect may be to encourage people to seek advanced education or training, develop a business, or serve in the military. Also, if you are laid off from a job through no fault of your own, a handful of lean years won’t bring your benefit amount crashing down. I think overall the effect of this seemingly convoluted formula is fairness.
Step 3: Applying the Computation Years
So, after you find the number of computation years, look at your earnings record. Select the number of highest-earning years equal to the number of computation years. Given our working example, the number of computation years of our hypothetical 48 year old is 16. Suppose the earnings record shows 8 high-paying years, 8 mid-level paying years, and 5 low-paying years. This person counts the 8 high-paying years and the 8 mid-level paying years, to equal 16, the number of computation years. In this example, the low-paying years are not included and therefore do not bring down the average. The sum total of computation years (when divided by 12) is called the Average Monthly Earnings (AME).
Step 4: AME to AIME
The amount of AME for each year is then indexed to reach AIME. This indexing is based on national average income for each computation year. The purpose of this calculation is to give you present-day dollar value for each of the year’s earnings you received in the past. The sum of the indexed years earnings yields average indexed monthly earnings (AIME). Trying to figure out AIME is difficult to say the least. If you receive worker’s compensation or a publicly-funded benefit payment, the amount of your AIME may be reduced. Achieving this step in the calculation is cumbersome, and questions you have are better left to the Social Security Administration. But having a general sense of how they achieve their numbers can help you notice any mistakes that may occur in the calculation of your benefit. It’s better to apply this information after the fact than before the fact.
Step 5: AIME to PIA
Finally, we apply a three-tiered calculation to the AIME to find what is know as the primary insurance amount (PIA). The calculation of PIA is a 3-tiered process, in which a smaller successive portion of AIME is alloted to achieve the base benefit amount, or PIA.
The calculation of PIA is as follows:
Before we freak out, let’s apply the formula to our hypothetical 48-year old disabled worker.
We already determined that we count the 16 highest earning years. Let’s say that for 8 of those years, this person earned $64,000.00. For the remaining 8 of those years, this person earned $41,000.00. We calculate AME as the sum total of these years.
16 years = 192 months.
Therefore, the AME is
AME is indexed to yield AIME. Let’s presume that the indexing yields an AIME of $4,705.00. Remember, this number may change if the beneficiary receives worker’s compensation or other benefits.
We apply the AIME to the PIA three-tiered formula.
32% of $4483-$744 = $1,196.48
15% of >$4483 = $31.80
$669.60 + $1,196.48 + $31.80 = $1,997.88
PIA = $1,997.88
Remember, this benefit amount is for a person who was earning over $4,000.00 per month prior to the onset of the disability. It is difficult to get by on a less than half of what you had been earning. Dependents may be entitled to auxiliary benefits, and this will increase the household income. However, the benefit payments rarely cover all that had been lost as a result of the illness or injury. For most people, receiving disability benefits payments is not a luxury, it is a necessity. People with substantial earnings would much rather go back to the way things had been prior to the onset of their disability.