Here's the New 2019 Social Security Benefit Formula




  • In Business/Economy
  • 2018-10-19 10:12:00Z
  • By Matthew Frankel, CFP, The Motley Fool
 

The Social Security Administration recently announced its annual list of changes that are based on inflation -- cost-of-living adjustments, the taxable maximum earnings, and the "earnings test" limits are just a few examples.

In addition, the formula used to determine Social Security benefits is updated each year, also in response to inflation. While the general method to calculate benefits remains the same each year, the numbers used in the Social Security formula change to compensate for inflation each year. Here's a rundown of how the overall benefit calculation method works, what's changed for 2019, and who the changes apply to.

Image source: Getty Images.

The method for calculating Social Security benefits

As I mentioned, the basic methodology by which Social Security benefits are calculated remains the same from year to year. If you aren't familiar, here's a quick explanation.

The Social Security Administration (SSA) keeps track of the money you earn each year in Social Security-covered employment, up to each year's taxable maximum. For example, the maximum taxable earnings amount in 2017 was $127,200, so that's the most that the SSA will track and eventually consider.

When determining your benefit, every year of your Social Security earnings record is indexed for inflation (you can find each year's multiplying factor on the latest version of the SSA's benefit calculation worksheet), and the 35 years with the highest adjusted earnings are considered.

These 35 indexed annual earnings amounts are then averaged together and divided by 12 in order to calculate your average indexed monthly earnings, or AIME.

Up until this point, the benefit formula remains the same from year to year.

Here's what is changing for 2019

Once your AIME is calculated, it's applied to a three-part formula to help determine your initial Social Security benefit. Your benefit will be based on 90% of a certain amount of your AIME, 32% of another portion, and if you've been a high earner, 15% of the rest.

The AIME thresholds that separate the three parts of the formula are known as the "bend points," and these are the parts of the formula that change every year.

With that in mind, the 2019 formula is:

This is the formula to calculate a beneficiary's primary insurance amount, or PIA. This is the amount that a beneficiary would be entitled to per month if they choose to start benefits at exactly their full retirement age. Taking Social Security before full retirement age -- as early as age 62 -- will result in permanently reduced benefits, whereas waiting until after full retirement age -- as late as age 70 -- will result in your PIA being permanently increased.

As an example, let's say that a beneficiary is considering claiming Social Security, and that their AIME is $5,000. Their PIA would be calculated as:

This amount would then be adjusted based on their full retirement age, and the age at which they chose to start collecting benefits.

The 2019 formula only applies to certain workers

Here's one very important point. The 2019 bend points mentioned in the previous section apply only to people who turn 62 in 2019, regardless of when they decide to claim benefits.

In other words, if you turn 62 in 2019, but don't start collecting your Social Security benefit until you turn 67 in 2024, the 2019 formula will still be used to calculate your benefit. To be clear, any earnings between now and then can absolutely be factored into your benefit, and updated inflation-indexing factors will be used when determining your AIME.

Similarly, if you claim Social Security benefits in 2019, but turned 62 in a previous year, you would use that year's bend points to calculate your PIA and initial benefit amount. You can find a historical list of bend points on the SSA's website.

A ballpark estimate of your future Social Security benefit

Because the Social Security formula that will be used to determine your future benefit will be based on the bend points in effect in the year you turn 62, there's no way to know what they may be.

However, you can get a good estimate of your future Social Security benefit based on your earnings history by viewing your most recent Social Security statement. You can do this by creating a mySocialSecurity account at www.ssa.gov, if you haven't done so already. In addition to a benefit estimate, there's a ton of valuable information available on your annual statement, so it's certainly worth the time.

The Motley Fool has a disclosure policy.

COMMENTS

More Related News

This Is the Best Way to Fix Social Security, New Analysis Shows
This Is the Best Way to Fix Social Security, New Analysis Shows

After examining a multitude of tax and benefit provisions, the Penn Wharton Budget Model reaches a surprising conclusion.

13 States That Tax Social Security Benefits
13 States That Tax Social Security Benefits

Are Social Security benefits taxable? You better believe it. Uncle Sam taxes up to 85% of your benefits, depending on your income, and several states tack on a state tax of their own. West Virginia, for one, treats Social Security benefits the same way as the feds. Other states tax Social Security benefits

The 1 Social Security Number You Need to Know
The 1 Social Security Number You Need to Know
  • Tech
  • 2019-02-21 11:06:00Z

Without it, you risk filing at the wrong time and losing out on loads of income in the process.

Don't Even Think About Claiming Social Security Until You Understand These 3 Things
Don't Even Think About Claiming Social Security Until You Understand These 3 Things

You could lose thousands in benefits if you're not informed.

Nearly 50% of Younger Workers Think They
Nearly 50% of Younger Workers Think They'll Be Ready to Retire Between 45 and 65. Are They Right?

It's a lofty goal. But is it attainable?

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Economy

facebook
Hit "Like"
Don't miss any important news
Thanks, you don't need to show me this anymore.