Average Indexed Monthly Earnings And The Calculation of Social Security BenefitsBy Kenton Koszdin on August 22, 2018 | In Disability Insurance
The Social Security Administration (SSA) typically calculates disability benefits using “average indexed monthly earnings (AIME),” defined as the sum of up to 35 years of a worker’s indexed earnings. A formula is applied to the AIME to compute the primary insurance amount (PIA), which determines the benefit amount paid to an individual applicant. Social Security uses a formula for the computation of the PIA to reflect changes in general wage levels generated by measurements of the national average wage index.
In calcualting an insured worker’s benefit, earnings are adjusted or”indexed” to show any change in general wage levels taking place during the years that the worker was actually employed. The indexing of earnings affects future benefits by theoretically helping better reflect any general increase in the standard of living during the worker’s employment throughout his or her life.
Up to 35 years of earnings are needed to calculate average indexed monthly earnings. Once the number of these years is determined, the years with the highest indexed earnings are combined and divided by the total number of months. The result is the average indexed monthly earnings (“AIME”) rounded down to the next lower dollar amount.
An insured worker becomes eligible for retirement benefits at age 62. If 2017 were the year of eligibility, the national average wage index for 2015 (48,098.63) would be divided by the national average wage index for each year prior to 2015 in which the worker had earnings, and then each ratio would then be multiplied by the worker’s earnings, resulting in the indexed earnings for each year prior to 2015. No indexing would be necessary regarding any earnings in or after 2015, which would be calculated at face value. The AIME would be computed using this amount to arrive at the worker’s primary insurance amount for 2017.
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