Learn about Average Indexed Monthly Earnings (AIME)

Average indexed monthly earnings (AIME) serve as the basis for calculating the primary insurance amount (PIA), crucial in determining an individual’s Social Security benefits. AIME is derived from the top 35 earning years of an individual, adjusted for wage growth through indexing. These indexed earnings are then averaged to compute a monthly figure, providing a key component in determining Social Security benefits.

In simpler terms, AIME aims to estimate an individual’s lifetime earnings using current wage levels as a reference point.

Calculation of AIME:

• AIME is derived from an individual’s earnings history over their working years, up to a maximum of 35 years.
• The earnings from each year are adjusted for inflation to reflect their value in today’s dollars. This process is known as indexing.
• The indexed earnings for each year are then averaged to produce a monthly figure, representing the individual’s average earnings over their career.

In 2024, if an individual’s AIME is $7,500, the primary insurance amount (PIA) calculation involves three steps:

1. 90% of the first bend point: The first bend point for 2024 is $1,174. So, 90% of $1,174 is calculated.
2. 32% of earnings over the first bend point: Earnings between the first and second bend points are subjected to a different percentage. In this case, earnings over $1,174 up to $7,078 are multiplied by 32%.
3. 15% of earnings above the second bend point: Finally, any earnings above $7,078 are multiplied by 15%.

By performing these calculations, the PIA is determined. In this example, the PIA would be $3,009.10, as the Social Security Administration rounds down to the nearest multiple of $0.10.

Another Method of calculating AIME

The Social Security Administration (SSA) utilizes the Primary Insurance Amount (PIA) calculation method, established under Title II of the Social Security Act, as part of the 1978 New Start Method.

Each year, the SSA records the earnings of covered workers up to the Social Security wage base (SSWB). To calculate Social Security benefits, the SSA examines the individual’s work history, considering the duration of employment and the earnings from the 35 highest-earning years.

To calculate your Social Security benefits, follow these steps:

1. Start With a List of Your Earnings Each Year:
   • Obtain your earnings history from your Social Security statement. Check now.
   • Only earnings below the contribution and benefit base, an annual limit, are included.
2. Adjust Each Year of Earnings for Wage Inflation:
   • Social Security utilizes wage indexing, a two-step process:
     • Each year, the national average wages are published by Social Security.
     • Earnings are indexed to the first year of eligibility for benefits, typically age 62.
     • Earnings are indexed to the average wage level two years prior to the first year of eligibility.
3. Use the Highest 35 Years of Indexed Earnings to Calculate the Monthly Average:
   • Social Security calculates the average monthly earnings based on the highest 35 years of indexed earnings.
   • If an individual doesn’t have 35 years of earnings, zeros are included in the calculation.
   • Total the highest 35 years of indexed earnings and divide by 420 (the number of months in 35 years) to determine the Average Indexed Monthly Earnings (AIME).

How you can improve AIME

To enhance your Average Indexed Monthly Earnings (AIME) and consequently increase your retirement benefits, consider the following strategies:

1. Work More Years: Aim to accumulate 35 years of substantial earnings, as the AIME is based on your highest-earning 35 years of work. Continuing to work until you reach this maximum can significantly improve your AIME.
2. Increase Your Income: Seek opportunities for higher-paying jobs within your industry or field. This may involve job changes, promotions, or acquiring skills that enhance your value to employers. Higher earnings throughout your career lead to greater benefits, as the AIME calculation is based on your highest-earning years.
3. Work Full-Time: Opt for full-time employment rather than part-time or gig work, as it typically results in higher earnings. Consistently working full-time throughout your career naturally increases your annual earnings, positively impacting your AIME.
4. Maximize Earnings Early: Focus on maximizing your income in the early years of your career. These early high-earning years have a lasting impact on your AIME, as the calculation is progressive and counts lower-earning years less than higher-earning ones.
5. Delay Retirement: If feasible, delay retirement and continue working to accumulate more high-earning years. Delaying retirement not only boosts your AIME but also leads to larger Social Security benefits when you eventually retire. By delaying claiming benefits beyond your full retirement age, your monthly benefit increases until you reach age 70.

What Is the Average Social Security Benefit per Month

To calculate Average Indexed Monthly Earnings (AIME), up to 35 years of earnings are needed, with the highest indexed earnings chosen. These selected earnings are then totaled and divided by the total number of months in those years. Finally, the resulting amount is rounded down to the next lower dollar amount. The average Social Security benefit per month in September 2023 was $1,706.98, with a total of 66.84 million beneficiaries.

Bottom Line

Indexed earnings for Social Security purposes involve indexing up to 35 years of earnings, selecting the highest-earning years, and dividing them by the total months in those years to determine Average Indexed Monthly Earnings (AIME). In essence, AIME is instrumental in determining Social Security retirement benefits, as it reflects an individual’s indexed earnings over their working years, with higher AIME values leading to higher benefit amounts.