QuoteA worker's retirement income benefit is based on his Primary Insurance Amount, or PIA. The PIA is the average of the highest 35 years of the worker's covered earnings (before deduction for FICA). Covered earnings in any year are limited by that year's Social Security Wage Base, the maximum earnings that could be subject to the OASDI portion of FICA payroll tax ($110,100 in 2012).[71] If the worker has fewer than 35 years of covered earnings, zeros are used to bring the total number of years of earnings up to 35. Years of covered work more than 2 years before the year the worker turns 62 are indexed upward to reflect the increase in the national wage via the average wage index (AWI) from the time at which the earnings were covered in the past to the value of the AWI two years before the worker turns 62 (which is the most recent year available at the date the worker turns 62). One-twelfth of this 35-year average is the average indexed monthly earnings (AIME). The PIA then is 90 percent of the AIME up to the first (low) bendpoint, and 32 percent of the excess of AIME over the first bendpoint but not in excess of the second (high) bendpoint, plus 15 percent of the AIME in excess of the second bendpoint. Bendpoints designate the point at which the rates of return on a beneficiary's AIME change.[72][73] In 2008, the bendpoints for calculating the PIA are a change from 90% to 32% at $711 and a change to 15% at $4,288.[73][74] This PIA is then adjusted by automatic cost-of-living adjustments annually starting with the year the worker turns 62. Similar computations based on career average earnings determine disability and survivor benefits. These alternate computations average less years of earnings when the worker dies or is disabled before age 62 and use different base years for the inflation adjustments.
I always thought the benefit calculation was some unfathomable black box but after reading this on Wiki it's fairly clear. :)
Sounds about right.
It is actually easier to understand on the publications and FAQs at socialsecurity.gov, but if you need to get a bit confused again, check out the windfall elimination provision for those with non covered government pensions. ;)
tl;dr
That's a pretty easy outline to understand. Soc Sec sends statements out, once a year I think it is. Shows what we should get based on the age of retirement.
It is prudent to use these formulas involving average wage and such for state pensions, since it allows the government to play with said pensions at any point of time as it sees fit. :)