United States
Hong KongSocial Security: how the benefit is calculated
Benefits are based on the highest 35 years of indexed earnings, converted to an average and run through a progressive formula to give the primary insurance amount payable at full retirement age - 67 for those born in 1960 or later.
The largest guaranteed income source most clients will have, and the one they understand least.
Eligibility
Forty credits, roughly ten years of covered work. Credits are earned on a quarterly basis up to four a year, and the earnings needed for a credit are indexed. Four a year, maximum.
Disability benefits require fewer credits at younger ages, on a sliding scale.
The calculation
- Take the highest 35 years of earnings, indexed for wage growth.
- Average them monthly, giving average indexed monthly earnings.
- Run that through a progressive formula with bend points, giving the primary insurance amount.
- Adjust for the age at which benefits are claimed.
The 35-year point matters. Fewer than 35 years of earnings means zeros are averaged in, so an additional working year can replace a zero and raise the benefit materially.
The bend point formula replaces a high percentage of the first portion of earnings and a much lower percentage of the rest, which makes Social Security progressive - it replaces more of a lower earner's income.
Full retirement age
| Born | Full retirement age |
|---|---|
| 1943 to 1954 | 66 |
| 1955 to 1959 | 66 plus months, rising |
| 1960 or later | 67 |
Claiming early or late
Benefits can start at 62 with a permanent reduction - around 30 per cent for someone with a full retirement age of 67. Permanent.
Delaying past full retirement age earns delayed retirement credits of about 8 per cent a year until 70, after which there is no further increase.
Claiming before full retirement age while still working reduces benefits above an earnings threshold. The withheld amount is not lost - it is credited back through a higher benefit after full retirement age - but the cash flow effect is immediate and clients are surprised by it.
Spousal and survivor benefits
A spouse may claim up to 50 per cent of the worker's primary insurance amount at their own full retirement age, reduced if claimed earlier. Spousal benefits earn no delayed retirement credits, so there is no reason to delay one past full retirement age.
A survivor may receive up to 100 per cent of what the deceased worker was receiving or entitled to. That is the asymmetry driving most claiming strategy: the higher earner's benefit becomes the survivor benefit and continues for the longer of two lives.
A divorced spouse married at least ten years and currently unmarried may claim on an ex-spouse's record without affecting that person's benefit. Their record is unaffected.
Contribution and benefit limits are indexed annually and several were changed by recent legislation. Confirm the current figure against the IRS before relying on it.
Common questions
How is a Social Security benefit calculated?
From the highest 35 years of indexed earnings, averaged monthly and run through a progressive bend point formula to give the primary insurance amount, then adjusted for claiming age.
Why do 35 years matter?
Fewer than 35 years of earnings means zeros are averaged in. An additional working year can replace a zero and raise the benefit materially.
How much does claiming early cost?
Claiming at 62 with a full retirement age of 67 produces a permanent reduction of around 30 per cent. Delaying past full retirement age earns about 8 per cent a year until 70.
What is the earnings test?
Claiming before full retirement age while working reduces benefits above an earnings threshold. The withheld amount is credited back later through a higher benefit, but the immediate cash flow effect surprises clients.
How do spousal and survivor benefits differ?
A spouse may claim up to 50 per cent of the worker's primary insurance amount and earns no delayed credits. A survivor may receive up to 100 per cent of what the deceased was receiving.