Retirement Benefits explained

Outlines the entitlement requirements and benefit calculations.

Table of Contents

  1. Introduction to Retirement Benefits
  2. Entitlement Requirements for Retirement Benefits
  3. Benefit Amount: Sample Calculation
  4. Delayed Retirement Credits
  5. Actuarial Reductions

Introduction to Retirement Benefits

Social Security Retirement Benefits are a crucial part of financial planning for many Americans. These benefits, provided by the Social Security Administration (SSA), are intended to replace a portion of the income of retired workers. Understanding how these benefits work and how they are calculated can help individuals make informed decisions about their retirement.

Entitlement Requirements for Retirement Benefits

To be eligible for Social Security Retirement Benefits, individuals must:

  •  Be at least 62 years old, though full retirement age (FRA) varies based on birth year.
  •  Accumulate 40 work credits, typically earned by working and paying Social Security taxes for at least 10 years.
  • Filed an Application

Benefit Amount: Sample Calculation

The benefit amount is based on an individual's earnings history. The SSA calculates the average indexed monthly earnings (AIME) and applies a formula to determine the Primary Insurance Amount (PIA), which is the basis for the benefits. The benefit amount is is reduced for early election or increased due to delayed retirement credits. 

Sample Calculation

  • Determine AIME: Calculate the average of the individual's 35 highest-earning years, adjusted for inflation through wage indexing.

    Wage indexing is a process used to adjust a worker's past earnings to account for changes in average wages since the year the earnings were received. This step is crucial for ensuring that a worker's earnings are considered in a manner that reflects their relative economic status during different years. Earnings are indexed up to the workers age 60 and earnings after age 60 are considered at face value. 
  • Apply PIA Formula:
    • For 2024, the formula is:

Computation of a Worker's Primary Insurance Amount(PIA) in 2024

Based on an Illustrative AIME of $6,000

90% First $1,174 of AIME, plus $1,056
32% Over $1,174 and through $7,078 plus $1,889
15% Over $7,078 $20

Primary Insurance Amount = 1056 + 1889 + 20 = $2965

Delayed Retirement Credits

If a worker delays taking Social Security benefits past their full retirement age, their benefits increase by 8% percent each year until they reach age 70.  The rate of increase depends on the worker's year of birth. For example, for those born in 1943 or later, the rate of increase is 8% per year, broken down monthly.

Individuals can earn delayed retirement credits (DRCs), which increase their Social Security benefit amount, starting in the month they reach full retirement age and ending the month they reach age 70.  The report in Social Security Timing shows the client's delayed retirement credits in the month of election, however the Social Security Administration only pays DRCs immediately if the individual delays benefits until age 70.

Delayed retirement credits are paid:

  • In January of the year following the year the credits were earned
  • In the month the individual turns age 70
  • In the month of the death of the worker (for widow(er) benefits with DRCs)


In order to simplify the process for applying Delayed Retirement Credit (DRC); Covisum applies all credits immediately.  This allows clients to  easily view the DRC's they ahve earned with minimal impact to the overall lifetime family benefit generated by the software. 

Age Delayed Retirement Credits Benefit Amount
67 0% $2965
68 8% $3,202
69 16% $3,439
70 24% $3,676

Actuarial Reductions for Early Retirement

If a worker opts to take benefits before reaching their full retirement age, their benefits are reduced. The reduction is based on the number of months a person retires early and varies by birth year. For instance, for someone born in 1960 or later and retiring at age 62, the monthly benefit is reduced by 30% for the primary beneficiary.

Social Security has a "Full Retirement Age" (FRA) for collecting unadjusted Social Security Retirement Benefits.  For years, age 65 was the FRA, but Congress changed the law to help with Social Security solvency issues. The FRA for individuals born between 1938 and 1942 was increased by two months for each year in that range. For those born between 1943 and 1954, FRA was moved to 66 years.  Similar increases will be phased in until the ultimate FRA is 67 years for anyone born in 1960 or later. 

Actuarial Reductions, are the factors applied to a benefit received before FRA is reached. In the case of early retirement, a benefit is reduced by 5/9 or one percent for each month before retirement for up to 36 months.  If the number is greater than 36 months,  then the benefit is reduced by 5/12 of one percent per month.  

Workers who elect early and then suspend benefits upon reaching FRA, the DRC's are based ont he benefit amount received prior to supension, not based on the PIA.  


For an actuarial reduction example, an individual claiming at the age of 62 with an FRA of 67 and a PIA of $2,965, the calculation would be:

1 - [36(5/9) + 24(5/12)] = 70% of the PIA, or $2,076.  


Reduction by Election Age