Social Security benefits are meant to replace about 40% of pre-retirement earnings for the average worker, but the precise amount varies based on average lifetime income and claiming age. The program doles out payments in a progressive fashion, meaning benefits replace more pre-retirement earnings for lower-income workers relative to higher-income workers.
Read on to learn how Social Security payouts are calculated, and how replacement rates vary across five hypothetical workers with different incomes.
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How Social Security retired-worker benefits are determined
The Social Security benefit payable to a retired worker is equal to their primary insurance amount (PIA) adjusted for early or delayed retirement. The procedure for calculating retired-worker benefits is explained in four steps below.
- Step 1: Adjust annual earnings to account for wage inflation using the national average wage index. This "indexation" ensures Social Security benefits reflect living standard increases over time.
- Step 2: Select a worker's 35 highest-paid years and convert the indexed earnings to a monthly average. This figure is known as the average indexed monthly earnings (AIME) amount.
- Step 3: Run the AIME through the Social Security benefits formula to determine the PIA, which is the retirement benefit a worker would receive at full retirement age (FRA).
- Step 4: Adjusted the PIA to account for early or delayed retirement. Workers who claim Social Security earlier than their FRA receive a permanently reduced benefit, and workers who delay Social Security beyond FRA receive a permanently increased benefit. The minimum age to claim is 62, and delayed retirement credits stop accumulating at age 70.
To summarize, the Social Security retirement benefit payable to a worker boils down to two questions: How much money did that worker make during the 35 highest-paid years of their career? And at what age did that worker start collecting Social Security? With that in mind, let's take a closer look at how income impacts the calculation of benefits.
Replacement rates for retired workers vary based on average lifetime earnings
When examining replacement rates, the Social Security Administration groups workers based on their career-average earnings, which refers to the average indexed income from the 35 best-paid years of their career.
The career-average earnings amounts detailed below are expressed in 2023 dollars, and the thresholds define five hypothetical workers.
- Very low-income worker: $15,867
- Low-income worker: $28,561
- Middle-income worker: $63,469
- High-income worker: $101,550
- Very high-income worker: $156,274
Assuming Social Security begins at FRA, the replacement rate for the hypothetical workers described above would be 78% for the very low-income worker, 57% for the low-income worker, 42% for the middle-income worker, 35% for the high-income worker, and 28% for the very high-income worker.
The Social Security retirement benefit payable to each of those hypothetical workers in 2023 is detailed below.
- Very-low-income worker: $12,689 ($1,057 per month)
- Low-income worker: $16,623 ($1,385 per month)
- Middle-income worker: $27,466 ($2,289 per month)
- High-income worker: $36,283 ($3,024 per month)
- Very-high-income worker: $44,357 ($3,696 per month)
Bear in mind that claiming age has a material impact on benefits, so early or delayed retirement can also have a profound impact on replacement rates. For instance, a worker born in 1960 (or later) would only receive 70% of their PIA if they claimed Social Security at age 62, but they will receive 124% of their PIA if they delay Social Security until age 70.
Here's the bottom line: While Social Security typically replaces about 40% of pre-retirement income on average, the actual replacement rate for very low earners could be north of 70%, and the replacement rate for very high earners could be less than 30%. Beyond that, differences in claiming age can cause even greater variation in these numbers.
Current workers interested in a precise estimate of their future Social Security benefit should make a my Social Security account through the Social Security Administration.
