Having an understanding on how Social Security calculates your benefits can help you better plan your retirement, especially if you are considered a high earner.
Social Security wage base
The Social Security wage base represents a kind of SSA cap on the quantity of annual earnings that which the system lays its tax—normally referred to as either the “taxable maximum” or “contribution and benefit base.” For 2025, that would be $176,100.
Amounts above this threshold are not subject to Social Security taxes and are not counted in your benefit computation. Since $130,000 is less than this limit, all of your earnings are used in the benefit computation.
Calculating your Average Indexed Monthly Earnings (AIME)
The SSA sets your benefits equal to your Average Indexed Monthly Earnings (AIME) – the average of your highest 35 years of earnings, wage inflated. If you have less than 35 years of earnings, zeros are added in the calculation, which will reduce your AIME. Assuming you have a full 35-year work history with steady earnings at or above $130,000, wage inflated, your AIME would be calculated as:
- Indexing past earnings: Adjust each year’s earnings to account for changes in average wages over time.
- Selecting the highest 35 years: Identify the 35 years with the highest indexed earnings.
- Averaging the earnings: Sum these 35 years of indexed earnings and divide by 420 months (35 years × 12 months) to determine your AIME.
Applying the PIA formula
Once your AIME is calculated, then the SSA uses a formula to determine your Primary Insurance Amount, or PIA-the monthly benefit you’d get at full retirement age. For 2025, the PIA formula has the following bend points, which are dollar amounts that divide your AIME into portions, with each portion multiplied by a different percentage:
- First bend point: This is the first dollar amount of your AIME.
- Second bend point: This is the dollar amount of your AIME that falls between the first and second bend points.
- Above the second bend point: Any amount of AIME above the second bend point.
The exact bend point values vary each year with national wage trends. For specific figures, refer to the SSA’s official resources.
Estimating your monthly benefit
With your steady income of $130,000 per year throughout the year, below the 2025 taxable maximum of $176,100, and assuming a full 35-year work history, your AIME would be pretty substantial. Using the PIA formula with the 2025 bend points, your estimated monthly benefit at full retirement age would be in the neighborhood of $3,500. This estimate has been based on today’s PIA formula and bend points, but for an exact calculation, consider using the SSA calculators online.
Claiming age and its impact on benefits
The age at which one opts to begin receiving their Social Security benefits makes a big difference in how much they receive:
- Early retirement (Age 62): Benefits are lower each month if claimed in advance of your FRA.
- Full retirement age: This is, in fact, around age 66-67 for people, depending on birth year; this means you claim at FRA, and you get 100% of your calculated benefit amount.
- Delayed retirement up to age 70: If you delay benefits beyond your FRA, your monthly payments increase owing to delayed retirement credits.
Assuming, for instance, that your FRA estimated monthly benefit is $3,500:
- Age 62: You might receive about $2,450 a month adjusted for the reduction because of early claiming.
- Age 70: You could get about $4,340 a month, adjusted for the increase in delayed claiming.
Cost-of-Living Adjustments (COLA)
Cost-of-Living Adjustments increase the rate of Social Security benefits each year to ensure that inflation does not reduce the purchasing power of beneficiaries. For 2025, the COLA will be 2.5%, increasing the average monthly benefit that retired workers receive.
This adjustment helps your benefits keep pace with inflation over time.
Additional considerations
- Taxation of benefits: Depending on your total income, some of your Social Security benefits may be subject to federal income tax. It’s a good idea to consult a tax professional to learn how this might impact you.
- Spousal and survivor benefits: Your earnings record may also impact benefits available to your spouse or survivors. Understanding these provisions may assist in comprehensive retirement planning.
