How Your Benefit Is Figured

In general, your Social Security benefit is based on your earnings averaged over your working lifetime. It is not based on your last five years or your high three years. This is different from many private pension plans that use a relatively small number of years.

Here's how we figure your Social Security benefit at full retirement age if you turn 62 in 2007:

Step 1- We determine the number of years of earnings to use as a base. If you were born after 1928, that base number is your 35 highest years of earnings. Fewer years are used for people born in 1928 or earlier.

Step 2- We adjust the earnings in these years for wage inflation. We call this "indexing."

Step 3- We determine your average adjusted monthly earnings based on the number of years in step 1. (If you don't have earnings in 35 different years, some years with $0 earnings will be used to figure this average amount.)

Step 4- We multiply your average adjusted monthly earnings by percentages in a formula that is set out by law. If you turn 62 in 2007, that formula adds together:

• 90 percent of your first $680 of average monthly earnings,

• 32 percent of the amount between $680 and $4,100, and

• 15 percent of everything over $4,100 to give you your full retirement benefit amount. (If you start your benefits before you reach full retirement age, this amount will be reduced.)

Note: If you turned 62 before 2007 or you would like additional information on how your benefit is figured, please read Your Retirement Benefit: How It Is Figured.

The formula results in benefits that replace a percentage of your earnings. The percentage is lower for people in the upper income brackets and higher for people with low incomes. The percentage for people who had average earnings during their working years is somewhere between those figures. That's because the Social Security benefits formula is weighted in favor of low-income workers who have less opportunity to save and invest during their working years.

If you become disabled or die before you reach full retirement age, we may use fewer than 35 years of earnings to calculate your average monthly earnings, but the same basic formula is still applied to figure your benefit amount.

You also can go to our Benefits Planner and use the earnings shown on your Statement to calculate your estimates yourself.