The American Social Security system was originally enacted in 1935 as an old-age pension system, a social insurance program funded by a payroll tax on employers and employees. In later years, the program was extended to cover other groups, including people with disabilities.

Average Earnings

According to the Social Security Administration benefits are determined based on average earnings over a lifetime.

Adjustment

Before they begin the calculation of payment, the Social Security Administration makes an adjustment of an individual's lifetime wages, called "indexing," which deals with changes in average wages over time.

Highest Earning Years

After average lifetime wages are entered and indexed, the Social Security Administration calculates the "average monthly indexed earnings" for the 35 years during which the retiree earned the most money.

Primary Insurance Amount

A formula is applied to the "average monthly indexed earnings," which results in a "primary insurance amount," or PIA. This is the benefit received upon eligibility. The lengthy and complex formula, which changes each year, can be found on the Social Security website, at the link provided below.

Eligibility Age

For people born before 1938 the eligibility age is 65. The age gradually rises to 67 for people born before 1959, and is fixed at 67 for people born after 1959.

Help for Benefit Calculation

The Social Security Administration provides help for people who wish to calculate their estimated benefits, including a retirement estimator, an online calculator and a downloadable program for home computer use. Information on these can be found at the official Social Security Administration website listed as a resource below.

Source:

Social Security Act, Encyclopedia Britannica

How Are Retirement Benefits Calculated?, Social Security Administration

2010 PIA Calculation Formula, Social Security Administration

More Information:

Social Security Website