Social Security and Medicare make headlines each election cycle as politicians float big questions around the viability of public safety nets in America. As such, each new administration spends time discussing potential revisions to these core programs. Given the impact any update to Social Security or Medicare could have on Americans—both those nearing retirement and those just beginning to plan for it—the Revo Financial team closely monitors any potential changes.
Before you start to worry about possible changes to government benefits, it’s helpful to understand how Social Security is handled and calculated.
What is Social Security?
When Social Security was first announced in 1935, a newspaper called it “a great national annuity system.” Essentially, Social Security pays an income to Americans when they’re “65 and jobless” as the news story put it.
The premise has changed only slightly in the past 90 years. These days, you can start collecting benefits at 62 and you don’t have to be jobless. The size of your benefits depends on whether you’re at “full retirement” age or not, and that age threshold changes based on when you were born. For example:
- If you were born in 1955, your full retirement age was 66 and two months.
- If you were born in 1970, your full retirement age is 67.
In both cases, you can earn “delayed retirement credits” by postponing your benefits after you reach full retirement age. You can do this up to age 70.
Adjustments to “full retirement age” may exist to help ensure Social Security lasts as lifetime expectancy and population increase. The pool of money used to pay this income is funded by a special 6.2% Social Security tax paid by both employers and employees.
How much will my Social Security benefits be?
The way Social Security benefits are calculated is famously complex, so the easiest way to understand them may be to sit down and talk through your personal situation with an advisor. However, this overview takes you through the main variables that impact those calculations.
Your Social Security benefits depend on your lifetime earnings. The Social Security Administration (SSA) looks at what you earned across your entire lifetime of earnings, then homes in on your 35 highest-earning years. SSA then indexes your average earnings against a national average and adjusts them for inflation. The number they get to is known as your average indexed monthly earnings (AIME), a term you may see referenced if you ever start reading up on benefits.
The goal of calculating your AIME is, essentially, to approximate your working salary and adjust it for inflation, both now and in the future.
SSA then uses your AIME to figure out your primary insurance amount (PIA).
There are two things to keep in mind here:
- Social Security benefits aren’t meant to be our only source of income in retirement.
- They weren’t designed to fully replace a salaried income.
When SSA calculates what percentage of your AIME to replace, they use a progressive system—replacing less of your salary the more you earn. You receive 90% of your AIME up to a certain amount (called a bend point). From there, you receive 32% of your AIME. After that, 15%. The bend points are adjusted each year to reflect inflation and changing circumstances.
Your primary insurance amount is a key metric but (and this is part of why the calculations are famously complex) it’s not the final amount you’ll receive.
Benefits are adjusted for inflation using a cost-of-living adjustment (COLA). In 2025, the COLA is 2.5%, so your PIA is adjusted upward by that amount. Beyond that, the size of your payments depends on when you start receiving your benefits. If you start payments prior to reaching full retirement age, you receive less than your PIA. If you delay retirement, you may receive more than your PIA.
How to plan for Social Security
As we mentioned earlier, Social Security benefits are just one source of income in retirement. The best age for you to start collecting benefits, and how those benefits fit in with other potential sources of income, likely depends on your personal circumstances, the size of your nest egg, and what kind of legacy you hope to leave your family.
A financial advisor can look at your situation holistically to help you understand how these benefits fit into a broader financial plan. Taking a holistic approach can also help you better understand how potential changes to Social Security could impact your retirement.
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