The Primary Insurance Amount (PIA) is a component of Social Security provision in the United States. Eligibility for receiving Social Security benefits, for all persons born after 1929, requires accumulating a minimum of 40 Social Security credits. Typically this is accomplished by earning income from work on which Federal Insurance Contributions Act (FICA) tax is assessed, up to a maximum taxable earnings threshold. For the purposes of the United States Social Security Administration, PIA is used as the beginning point in calculating the annuity payment of benefits that is provided to an eligible recipient each month during retirement until the recipient's death. Generally, the more a person pays in FICA taxes during their life, the higher their PIA will be. However, specific rules in its computation may deviate from this general rule.
Computation
The main determinant of PIA is the Average Indexed Monthly Earnings (AIME). To calculate AIME, the individual's wages are first expressed in today's dollars by inflating the value to reflect increases in the wage level during the worker's years of employment. The inflated wages are totaled across the highest 35 earnings years. The sum is then divided by 420 (12 months multiplied by 35 years) in order to calculate real average monthly earnings. This estimate of real monthly earnings is referred to as the AIME.
As a redistributive function of AIME, PIA is designed to reward workers who earn more with higher benefits, but also to ensure that benefits do not rise nearly as fast as earnings. Monthly Social Security benefits at full retirement age are determined through adjusting AIME by multipliers at specific earnings thresholds, which are called "PIA bend points". Accordingly, the PIA is the sum of three separate percentages of portions of estimated AIME. The percentages of the PIA formula are fixed by law, but the dollar amounts in the formula change annually in response to changes in the national average wage index. For 2023, the PIA computation formula is:PIA = 0.90*(AIME up to $1115) + 0.32*(AIME between $6721 and $1115) + 0.15*(AIME - $6721)Accordingly, a beneficiary's PIA will be the sum of:
(a) 90 percent of the first $1115 of average indexed monthly earnings, plus
(b) 32 percent of average indexed monthly earnings between $1115 and $6721, plus
(c) 15 percent of average indexed monthly earnings over $6721
Conversion to actual benefits
The actual amount of benefits provided to the recipient depends on the age at which they claim their social security benefits, relative to their full retirement age. Full retirement age (FRA) is a function of year of birth and is defined by the Social Security Administration as follows:
Eligible individuals can begin collecting old-age insurance benefits as early as age 62, which is referred to as the Early Entitlement Age (EEA). Accordingly, individuals born between January 2, 1955, and January 1, 1956, are eligible to accept retirement benefits when they turn 62 in 2017. However, there exists a penalty for collecting benefits before full retirement age: the recipient's monthly benefits are permanently reduced. For instance, if a recipient turns age 62 in 2017, their benefit will be approximately 25.8 percent lower than it would have been at full retirement age of 66 and 2 months. In contrast, recipients are rewarded through delayed retirement credits if Social Security benefits are claimed after full retirement. For recipients born in 1943 or later, 8 percent is added to the yearly benefit amount for each year the recipient delays receiving Social Security benefits beyond their full retirement age. No delayed credit is given after age 69. Eligible individuals who collect their benefits at full retirement age will receive their calculated PIA. More specifically, in 2017, beneficiaries who retire at age 62, full retirement age, or age 70 receive $2,153, $2,687, or $3,538, respectively, in benefits.
Effects of working on retirement benefits
Contrary to common perception, it is still possible to receive retirement benefits and still continue to work. For individuals who decide to accept benefits before their retirement age, $1 in benefits is deducted for each $2 that is earned above the annual limit ($16,920 for 2017). In the year of an individual's full retirement age, up until the precise month of full retirement, $1 of benefits is deducted for every $3 that is earned over the annual limit ($44,880 for 2017). Regardless of the level of earnings, there are no deductions from benefits beyond full retirement age.