How are Social Security Benefits Calculated
The "primary insurance amount" (PIA) is the benefit (before rounding down to next lower whole dollar) a person would receive if he/she elects to begin receiving retirement benefits at his/her normal retirement age. At this age, the benefit is neither reduced for early retirement nor increased for delayed retirement.
PIA formula bend points
The PIA is the sum of three separate percentages of portions of average indexed monthly earnings. The portions depend on the year in which a worker attains age 62, becomes disabled before age 62, or dies before attaining age 62.
For 2018 these portions are the first $895, the amount between $895 and $5,397, and the amount over $5,397. These dollar amounts are the "bend points" of the 2018 PIA formula.
PIA formula
For an individual who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2018, or who dies in 2018 before becoming eligible for benefits, his/her PIA will be the sum of:
(a) 90 percent of the first $895 of his/her average indexed monthly earnings, plus
(b) 32 percent of his/her average indexed monthly earnings over $895 and through $5,397, plus
(c) 15 percent of his/her average indexed monthly earnings over $5,397.
https://www.ssa.gov/oact/COLA/piaformula.html
As you can see from the PIA formula, people who have incomes of $895 per month receive a 90% indexing. Which is a fancy word for saying 90% of that money is acknowledged and used to calculate your benefits. Then after that is decreases to an indexing of 32% and lastly 15%. As a result, you can see that when a person reaches the maximum social security contribution, their contribution that is calculated for their benefits decreases to only 15% of money paid into the system.
Example on How Your Income is Calculated When It is Time To Retire
If you have an income of $10,740 per year; 90% of your income would be included as primary insurance amount (PIA). That equals $9,666. That amount would be used to calculate your benefits.
If you have an income of $60,000 per year; 90% of your income up to $10,740 would be included as primary insurance amount (PIA), then 32% of the remainder would be included as primary insurance amount (PIA). That equals $25,429. That amount would be used to calculate your benefits.
As a result a person earning approximately 5.5 times the amount would only receive 2.5 times the PIA compared to the first person.