Social Security/indexation and AIME

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JMG
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Social Security/indexation and AIME

Post by JMG »

Hi. I have some questions about how Social Security calculates the average indexed monthly earnings (AIME) that determine your benefit. Is my understanding below correct?

1. I turn 60 this year. Social Security will use this year’s inflation numbers to establish the index factors to apply to previous earnings to make them comparable to current earnings. I think that they announce the inflation number in October based on the results of the 3rd quarter. The higher the inflation number, the higher the index factors.

2. Assuming I retire at 62, I’ll have had maximum earnings for 30 of the 35 earning years. If inflation pushes this year’s wage indexation factors up enough, might that bump up some of my previous year’s earnings up to that year’s taxable max? Or is each year’s taxable max also time-adjusted up? Does this matter?

3. Between 2021-2022, the second bend point used to calculate the AIME went up $170 to $6,172 and the SS taxable earnings cap went up $4,200 to $147,000. The difference between the cap increase ($4,200) and the bend point increase ($170) is $4,030. Does that mean that each year’s (net) cap increase creates headroom for the monthly AMIE to grow by the following formula:

• Multiply the net increase in earnings cap by 15% (the AMIE factor for the excess over the second bend point)
• Multiply that number by 12 because it’s for one year
• Divide that number by 420 (reflecting the 35 year interval)

Using my numbers: ($4,030) times .15 times (12/420) = $17 a month increase of AMIE

Any thoughts welcome.
billaster
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Re: Social Security/indexation and AIME

Post by billaster »

You AIME is not indexed to inflation. It is indexed to the Average Wage Index (AWI). So your benefits goes up with the rate of wages, not inflation. This is good because in general wages go up faster than inflation, which is what you expect with a rising standard of living.
Here is the AWI for each year:
https://www.ssa.gov/oact/COLA/AWI.html

1. You use the AWI for the year you turn 60 as your base (2021 and 2022 not published yet).
2. Divide your base wage by each previous year's AWI to get the index factor.
3. Multiply each year's social security wages by the index factor for that year.
4. Sum up the top 35 index adjusted wages.
5. Divide by 420 to get your 35-year monthly average. That is your AIME.

Here's an example:
https://www.ssa.gov/oact/progdata/retirebenefit1.html

Keep in mind that social security only records up to the social security maximum contribution for each year, not your total wages if they exceed the cap. When you multiply by the index factor, the result will be bigger in current dollars, but that's already accounted for since it was capped when you contributed.
Here are the contribution and benefit caps:
https://www.ssa.gov/oact/COLA/cbb.html

The bend points are also adjusted by the AWI as shown here:
https://www.ssa.gov/oact/cola/piaformula.html

The answer to your last question is that the increase in the contributions cap and the AIME are both indexed to the same AWI. So they both increase at the same rate each year. So if you earn more than the cap each year, your adjusted earnings will always be very close to the maximum for your base year and in some cases slightly exceed it. They are not exactly the same because there are some exceptions on changes to the contributions cap in some years as shown here.
https://www.ssa.gov/oact/cola/cbbdet.html

Case B here shows an example of a person who earned more than the cap each year, but note that their social security nominal wages shown are exactly the cap for that year. When multiplied by the index factor their AIME earnings are larger than that year's cap and in some cases slightly exceed that person's base year cap of $118,500. So the current cap does not limit each year's adjusted wages. Each year's wages are already capped by that individual year's cap.
https://www.ssa.gov/oact/progdata/retirebenefit1.html
Last edited by billaster on Sun Jul 03, 2022 12:46 pm, edited 1 time in total.
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22twain
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Re: Social Security/indexation and AIME

Post by 22twain »

JMG wrote: Sun Jul 03, 2022 10:38 am 1. I turn 60 this year. Social Security will use this year’s inflation numbers to establish the index factors to apply to previous earnings to make them comparable to current earnings. I think that they announce the inflation number in October based on the results of the 3rd quarter. The higher the inflation number, the higher the index factors.
They do not use the Consumer Price Index (CPI-W) for this. It comes into play beginning at age 62 when calculating the annual Cost of Living Adjustment (COLA) to your SS benefit.

Until age 60, your earnings are indexed (adjusted) according to the National Average Wage Index (NAWI).

https://www.ssa.gov/oact/cola/AWI.html

The calculations apparently take most of a year, so last year's NAWI will be announced this fall, either October or November, I've forgotten which. This year's NAWI will be announced in fall 2023. It will be used to calculate your initial Principal Insurance Amount (PIA) which determines your initial SS benefit at age 62 (2024).

Thereafter, your indexing factors for earnings through age 60 will remain fixed, and your PIA will be adjusted annually according to the COLA, beginning in December 2024.

[billaster beat me to it while I was writing this :beer ]
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Mlm
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Re: Social Security/indexation and AIME

Post by Mlm »

Have you tried https://ssa.tools/

Copy and Paste your earnings from your social security statement. You can make some assumptions about future earnings if you want.
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JMG
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Re: Social Security/indexation and AIME

Post by JMG »

Thanks very much for your thoughtful answers.
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David Jay
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Re: Social Security/indexation and AIME

Post by David Jay »

Note that the bend points are indexed to AWI as well, so both bend points go up each year in proportion to the increase in AWI.
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22twain
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Re: Social Security/indexation and AIME

Post by 22twain »

David Jay wrote: Sun Jul 03, 2022 8:32 pm Note that the bend points are indexed to AWI as well, so both bend points go up each year in proportion to the increase in AWI.
However, for each person, the only bend points that matter are the ones corresponding to the year that they turn 62. If their AIME needs to be re-calculated afterwards because they earned enough new money to "replace" one of their high-35 earning years, their age-62 bend points are used with the new AIME to calculate the new PIA. Also, their post-age-60 earnings are not indexed to the AWI, but are simply used as-is, when calculating the AIME.
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David Jay
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Re: Social Security/indexation and AIME

Post by David Jay »

22twain wrote: Sun Jul 03, 2022 8:59 pm
David Jay wrote: Sun Jul 03, 2022 8:32 pm Note that the bend points are indexed to AWI as well, so both bend points go up each year in proportion to the increase in AWI.
However, for each person, the only bend points that matter are the ones corresponding to the year that they turn 62.
+1
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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