How Are Social Security Benefits Calculated?

Generally, an individual must work for at least 10 years and pay into the Social Security system to be eligible for retirement benefits. A prospective retiree’s initial monthly retirement benefit, or primary insurance amount (PIA), is calculated using the individual’s average indexed monthly earnings (AIME). The AIME is determined by taking the sum of monthly earnings for the 35 highest years of earnings (if one was in the workforce for fewer than 35 years, the total number of working years is used). Then, the sum is divided by the number of months being considered. For 2025, the PIA calculation is the sum of 90 percent of the first $1,226 monthly earnings, 32 percent of average earnings between $1,227 and $7,391, and 15 percent of the average earnings over $7,391. Each change in the percentage of monthly earnings is known as a “bend point”.

Under current law, the full retirement age is 67 years for all individuals born in 1960 or later. A retired worker is eligible to begin collecting Social Security benefits as early as age 62, but doing so would result in a permanent reduction to that individual’s monthly benefits. Likewise, a retired worker who delays collecting benefits beyond the full retirement age would receive higher monthly benefit payments than if the retiree began collecting sooner. However, despite the reduction in benefits, many workers begin collecting Social Security payments as early as possible. In 2023, 24 percent of retired workers began claiming Social Security benefits at the earliest eligible age of 62, and 53 percent of retirees began collecting benefits some time before reaching full retirement age.

What Are the Approaches for Reducing Social Security Benefits?

All 70 million Social Security beneficiaries in 2033 will face a sizeable reduction in benefit payments if the OASI Trust Fund is actually depleted in that year. In particular, retirees with the lowest lifetime earnings and for whom Social Security payments represent the majority of total retirement income will be most affected.

To delay the depletion date, benefit modifications could be part of a balanced approach to improve the program’s solvency. Proponents of such an approach argue that a well-designed benefit reduction policy would improve equity in Social Security by better balancing the payouts between low-income and high-income earners. The following are some approaches to adjusting benefits that could improve the solvency of the trust fund.

Reduce Benefits for Newly Eligible Retirees

Some plans evaluated by the Social Security Administration (SSA) would reduce benefits for newly eligible retirees. One would reduce total benefits for all new beneficiaries by 5 percent starting in 2025. Such a reform would raise $134 billion over 10 years, according to SSA, but would have significant effects in the long term — it would increase the long-range (75 years) actuarial balance by 18 percent. This reform would harm lower-income recipients as seniors at the bottom of the income distribution rely on Social Security as their main source of income.