Chris Stein, CFP®
Elapsed vs Computational Years
We received a question asking us to clarify how the 40 Elapsed and 35 Computational Years work when Social Security calculates your Retirement Benefit. Here is the question:
“I know that Social Security uses the 35 highest inflation factored years to determine a worker’s Social Security Retirement Payment. But I’m confused about the “past 40 years” that you talk about. Does this mean the Social Security calculation does not take into account, earnings from 41 years ago?”
Calculating SS Benefits
This question refers to the method that the Social Security Administration (SSA) uses to calculate your SS benefits. Today I will focus on Retirement Benefits to answer this question. The basic method that the SSA uses to calculate your Retirement Benefit is this:
This process starts with the assumption made by the SSA that a “typical” work lifespan is 40 years. In the SSA Handbook, Section 704 they describe “elapsed years” as those “calendar years after 1950, or after you turn 21, if this is later and end with the year before first eligibility (or death if earlier)”. As a reminder, your age of first eligibility is 62. So you can see where the 40 elapsed years come from (62-22 = 40).
Next SS determines your “computation years”, or that number of years that will actually go into the calculation. For Retirement Benefits, Computation Years are 5 LESS than your Elapsed Years, but must be at least 2 years at a minimum. This is where the “35 Computation Years” comes from (40-5 = 35).
Now the SSA takes a look at your ENTIRE work history FROM BIRTH. To equalize everything they adjust those past earnings years for wage inflation to arrive at a list of what is called “Indexed Earnings”, or in other words they restate all your earnings record into the equivalent they would be today, adjusted for inflation (more or less).
To calculate your Average Indexed Monthly Earnings (AIME), SS takes your 35 HIGHEST indexed amounts from step 3 and averages them into a monthly amount. It is NOT the most recent 35, nor the 35 from age 22 as many people believe. SS looks at your ENTIRE work history from birth and uses the highest 35 years (taking into consideration the wage caps in place in any year you exceeded them). This step actually answers the question as posed above. Since the SSA considers ALL of your work history they will absolutely include earnings from 41 years ago in the calculation if that year is one of your highest 35.
From the AIME your Primary Insurance Amount is calculated which represents your Full Retirement Age (FRA) benefit. The amount you actually receive of this PIA depends on when you claim (early or late), whether or not you are subject to the Earnings Test or other offsets like WEP or GPO, etc. These are topics beyond the scope of this post, but we have discussed them all previously and additional information can be found by searching this site with the search box.
The 40 Elapsed Years is not discussed much anymore since it is just a stepping stone to the really important 35 Computational Years. For people who turned 22 prior to 1951 they actually used a calculation with fewer than 40 Elapsed Years, which also leads to fewer Computation Years, but since those people are now older than 86, and we assume they have already claimed SS, we do not talk about that old rule. You and I are all in the boat that starts with the 40 Elapsed Years and finishes with the PIA calculation.
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