Calculating Social Security

A common question addressed by RetireReadyTM is how TRAK calculates Social Security. Occasionally someone will object to a value used, stating that the Social Security amount is too high. (Most often this occurs when retirement is more than 10 or 15 years in the future). The method for calculating Social Security is documented below.

The Social Security Administration (SSA) does not provide a "best method" for calculating Social Security. Nor does the SSA allow for automated access to their website so TRAK could get client information from the website. Therefore, TRAK has an internal formula for estimating a client's Social Security benefit.

How Social Security is Calculated

Before explaining how TRAK calculates Social Security, it is best to have an understanding how Social Security is calculated by the Social Security Administration (SSA). The formula for calculating the Social Security for a person requires a number of steps:

1.The income from each calendar year (not to exceed the Social Security Integration Level, SSIL, each calendar year) is entered into a chart. This value is multiplied by a index factor to provide an indexed earning value for the calendar year. (The index factor is based on the product of the Average Wage Indexes from the calendar year until age 62).

2.The highest 35 values from the indexed earnings are added together and divided by 420 (the number of months in 35 years). This provides the Average Index Monthly Earnings (AIME).

3.An annual adjusted formula is applied to the AIME to determine the Primary Insurance Amount (PIA). The PIA formula in 2021 is:

Tier 1: 90% of the AIME at or below $996, plus

Tier 2: 32% of the AIME between $996 and $6,002

Tier 3: 15% of the AIME above $6,002.

Social Security Administration's Worksheets

Obviously TRAK does not ask enough historical information from the client to use the SSA's worksheets. Additionally, SSA worksheets to estimate a PIA are typically only available for the current year and possible next year.

Thus, to calculate the value for Social Security, TRAK makes a number of assumptions. Historical income trends, as well as future predictions, are considered in the method for Social Security calculations. The following assumptions are made to calculate the estimated PIA for a client:

1.For the client's income, their raise is considered to be consistent, both historically and looking forward.

2.To calculate future SSIL (step 1 above) at age 62, the historical 20 year-average1 COLA is applied to future years.

3.The historical 20 year-average1 wage index at age 62 (used in step 1 to provide indexed earnings) is used to calculate future wage index values.

4.The 20 year-average1 COLA for the two tiers at age 62 (step 3 above) is calculated and applied to the dollar values for forward looking values.

Note:The historical COLA applied to the first two tiers of the formula (step 3 shown above) is historically different then the COLA applied to the SSIL.

5.The three tier formula shown above is used to estimate the client's PIA.

6.If the client is retiring after or starting age is after 62, the COLA is applied to the value for the respective number of years.

7.If the client is retiring prior to their normal retirement age, a penalty is applied based on the number of months early.

8.If the client delays Social Security beyond normal retirement age, a credit is applied based on their year of birth.

9.If a client has less than 35 years of eligible Social Security years of income, this will reduce their income.

10.If a client is affected by Windfall Elimination Provision, this can also be included to reduce the Social Security benefit.

Social Security Windfall Elimination Provision (WEP)

The WEP reduces an individual's Social Security benefit due to insufficient years (less than 30) of substantial earnings (as defined by the provision). This provision reduces the percent of income credited from the first tier (normally 90%) to a lower percentage based on the number of years the client had substantial earnings (5% per year less than 30 years, but not lower than 40% crediting).

For more detailed information about WEP, please visit SSA web site.


1 Average rates of return are technically average compounded rates of return. Note that when looking at the historical average values, the data from the latest years from the SSA's website is used. This does not always include current information. For example, at the time of writing this document (May 2014), the wage increase for Average Wage Indexing Series is updated through 2012.