What formula is used to calculate retirement benefits in Social Security?

The calculation of retirement benefits in Social Security is based on the Average Indexed Monthly Earnings (AIME). This formula takes into account a worker's earnings over their lifetime, indexing those earnings to account for wage growth. The AIME is determined by calculating an individual's highest 35 years of indexed earnings and then averaging them on a monthly basis. This process allows for a fair assessment of how much an individual has contributed over their career, reflecting their working years’ earnings in today's dollars.

The calculated AIME is then used to determine the Primary Insurance Amount (PIA), which is the basis for the retirement benefits one will receive at full retirement age or any age they choose to retire. This method ensures that Social Security benefits are progressive, providing higher benefit rates relative to earnings for lower-income workers compared to higher-income workers.

Understanding the importance of the AIME is crucial, as it directly influences the amount of retirement benefits one will receive from Social Security, making it a cornerstone concept for anyone studying this subject.