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The Social Security Benefit Formula

To calculate an individual’s old-age benefits, the Social Security Administration first considers a beneficiary’s 35 highest-earning years (with each year’s earnings adjusted for national wage growth) to determine their average indexed monthly earnings (AIME). SSA then runs this AIME through a progressive replacement rate formula to determine a beneficiary’s primary insurance amount (PIA), the monthly benefit that a worker receives if they elect to start receiving benefits at their full retirement age (currently age 67 for those born after 1959).

As shown in the figure below, the current benefit formula includes two “bend points” at which the marginal replacement rate for earnings (also known as the PIA factor) changes. In 2023, the bend points are $1,115 and $6,721, with the PIA replacing:

  • 90% of the first $1,115 of AIME
  • 32% of AIME between $1,115 and $6,721
  • 15% of AIME over $6,721 (up to $13,350 in 2023, equivalent to the taxable maximum)

These bend points increase annually with the average wage index. The maximum PIA is $3,627 for those reaching full retirement age in 2023.

A Better-Targeted Benefit Formula

The Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings previously proposed increasing the progressivity of Social Security’s benefit formula, boosting the replacement rate (and bend point) for the lowest lifetime earners while reducing it for the highest. Table 1 and Figure 1 compare current law with the BPC proposal.

Table 1: PIA Factors, Current Law vs. BPC Reform Proposal

*Estimate. The BPC proposal sets this bend point at the 50th percentile of AIME minus $100. To the best of our knowledge, information on the distribution of AIMEs is unavailable, so we have used the average wage index divided by 12 minus $100 as a proxy here.

Figure 1: PIA Factors, Current Law vs. BPC Reform Proposal
This reform would bolster the solvency of the Social Security trust funds while increasing monthly benefit amounts for the lowest lifetime earners, who depend most on the program for income in retirement. SSA’s Office of the Chief Actuary estimated that BPC’s proposal would close around 1% of Social Security’s long-range shortfall.

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