Dear Rusty: A friend and I, both approaching 62 years old, were discussing Social Security the other day, and he said that they take the average of your highest 10 years of earnings to figure out what your benefit is. I told him I thought the formula is a lot more complicated than that, but he insisted he was right saying his cousin has a friend who works for Social Security. Is my friend correct? Signed: Skeptical
Dear Skeptical: You are right to not take your friend’s opinion as correct, even when he claims to have a source who works for Social Security. Social Security rules are quite complicated, and are easily misinterpreted, even by some folks working for the Social Security Administration. Most of the time, the mistaken opinion about the 10 year factor is due to a misunderstanding of what that factor actually is used for by Social Security, which is to determine your eligibility to collect benefits in the first place. A worker must have earned wages for a total of 40 quarters, or at least 10 years, in order to receive Social Security benefits on their own work record. There are other ways to be entitled to Social Security benefits (e.g., spousal, survivor and disability benefits), but to claim on your own work record you must have earned at least 40 quarter credits (10 years times 4 quarters per year = 40 quarter credits). And the good news is that you only have to earn a certain dollar amount to get credit for a quarter; you don’t have to work the entire calendar quarter.
So how does Social Security actually figure your benefit amount? To determine that amount they first use the 35 highest earning years in your lifetime work record, but only earnings up to the amount you paid Social Security taxes on. They then adjust (index) each of those year’s earnings for inflation, add them up and divide the total by 420 (the number of months in 35 years) to arrive at something called your Average Indexed Monthly Earnings (AIME). Note here that if you didn’t have at least 35 years of earnings, they will put zero’s in for the years you didn’t earn, which means that your AIME will be smaller if you didn’t work at least 35 years. Now your AIME isn’t the amount of your benefit either but it is used to calculate what Social Security calls your “Primary Insurance Amount” or “PIA” – the amount of benefit you will be entitled to at your “Full Retirement Age” or “FRA” (as you can tell, Social Security loves acronyms!). In true government fashion, the calculation of your PIA uses a formula which includes something called “bend points”, which are several points at which a different percentage of your AIME is used to figure the amount of benefit you would get if you took benefits at your full Social Security retirement age (age 66 for most people retiring today, but more if you were born after 1954). And that’s where it stops – if you start taking you benefit at your full retirement age. But if you retire earlier your benefit will be reduced. And if you retire later your benefit will be increased. How much of a reduction or increase? That’s a topic for another time.
The information presented in this article is intended for general information purposes only. The opinions and interpretations expressed in this article are the viewpoints of the AMAC Foundation’s Social Security Advisory staff, trained and accredited under the National Social Security Advisors program of the National Social Security Association, LLC (NSSA). NSSA, the AMAC Foundation, and the Foundation’s Social Security Advisors are not affiliated with or endorsed by the United States Government, the Social Security Administration, or any other state government. Furthermore, the AMAC Foundation and its staff do not provide legal or accounting services.
 If you earned more than Social Security’s maximum taxable amount in any given year, your earnings for Social Security’s purposes for that year will be the maximum taxable amount – the maximum amount on which Social Security taxes were withheld.