Primary Insurance Amount

As you prepare to retire, it becomes more important to understand your Social Security benefits and related terminology. Social Security benefits are laden with acronyms: PIA, FRA, AIME – it’s a relative alphabet soup!  But your PIA, or Primary Insurance Amount, is a focal term in determining your benefits.

Primary Insurance Amount (PIA) is simply the amount of monthly Social Security benefits you will receive if you begin benefits at your Full Retirement Age. If you have already begun Social Security benefits, this article may be of little significance to you (unless you choose the Do-over Option outlined in another article). If this is the case, your benefits will continue at their current level subject only to the annual Cost of Living Adjustment.  If you have not yet begun benefits, your Social Security Statement presents an estimate of your PIA. (Your Social Security Statement is mailed several weeks before your birthday or can be obtained by request from Social Security Administration.)

Your PIA is based on detailed—and confusing–calculations. For retirement planning, it is important to understand a few key features of the calculations. Your monthly PIA benefit payment is a portion of your Average Indexed Monthly Earnings (AIME) for the 35 years of your highest earnings, where earnings for years before age 60 are indexed to reflect increases in US workers’ average wage level. If you have less than 35 years of income, your incomes for the remainder of the 35 years will be reflected as zero. The maximum income for any year is equal to that year’s maximum earnings subject to Social Security taxes, which is $106,800 in 2010. In other words, only the amount of income you earn that is $106,800 or below is taxed for Social Security.

More simply, AIME is the average monthly earnings after indexing for the workers highest earning 35 years. AIME is converted to Primary Insurance Amount—also in a complex way. For 2010:

  • the first $761 of your AIME is multiplied by 90%;
  • the amount between $761 and $4,586 is multiplied by 32%; and
  • any amount in excess of $4,586 is multiplied by 15%.

Let’s look at an example: Betty is retiring in 2010 at age 62. Her AIME is calculated at $4,800. Her PIA will be calculated as follows:

  • $761 x 90% = $684.90
  • ($4,800 – $761) x 32% = $1,292.40
  • ($4,800 – $4,586) x 15% = $32.10
  • Total PIA: $684.90 + $1,292.40 + $32.10 = $2,009.40

Note that the calculations are always rounded down to the nearest $0.10.

The PIA calculation uses 3 percentages, known as “bend points,” which represent the portions of your AIME that are indexed each year.  This formula, with its decreasing percentages of 90%, 32% and 15%, ensures that Social Security benefits replace a higher percentage of earned income for individuals at lower income levels. Social Security payments may replace 60% of pre-retirement income for someone earning minimum wage, but only 25% of income for someone earning the maximum income subject to Social Security taxes. If you earn twice the maximum income subject to Social Security taxes, then Social Security will replace only about 12.5% of your income.

An understanding of the formulas is useful in decisions concerning how long to continue working. For instance, suppose Betty in the example above already had 35 years of earnings history when she reached age 62. If she works four more years and then begins Social Security benefits, earnings from the next four years will replace lower earning years, thus having little impact on her AIME and, therefore, PIA. Moreover, since she is already in the 15% portion of the formula that converts AIME to PIA, her PIA would not be appreciably higher if she works four more years than it is today. However, if Betty had been a stay-at-home mother who returned to the workforce after raising children, she may be able to appreciably raise her PIA by working a few more years.

Although not intentionally designed to be so complex, Social Security benefits are indeed so. Sorting through the options and making the best choices for your individual situation may be overwhelming. We can help you understand your selections and advise you regarding your best outcomes. Begin by getting your free, no-obligation Social Security Snapshot Report.

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