How PIA Relates to Your Benefit

Photo credit: jb

If you’ve been looking into your Social Security projected benefits for long, you’ve probably run across the term Primary Insurance Amount, or PIA. Click on the link to see how the PIA is calculated if you need more background information on the PIA.

What’s important to know is that the PIA is essentially the amount of your retirement benefit if you file for it exactly on your Full Retirement Age (FRA) month. But it’s quite common for an individual to file for retirement benefits either before or after FRA. If you file for your retirement benefit before or after FRA, even by a month, there is a difference between your PIA what your benefit will be.

Before FRA

If you file for benefits before the month when you reach FRA, there are two reduction rates that may apply to your benefit, reducing it from the PIA amount. The reason there are two rates is because originally the FRA for everyone was 65. This made it simple to cause a 20% reduction for anyone who started benefits at the earliest age, 62, which was 36 months before FRA. So the reduction factor for any filing up to 36 months before FRA is calculated at a rate of 5/9% (approximately 0.5556%) per month, which works out to 20% for the full 36 months.

Later, when the rules changed such that FRAs could be at ages beyond 65, the original rate of 5/9% per month was deemed too aggressive of a reduction. So a smaller value was determined for reductions beyond the first 36 months of reduction, at 5/12% per month, (approximately 0.4167%). This works out to a 5% reduction for each 12 months beyond the first 36.

Wow, that’s not complicated at all, is it? Geez. Here’s a walkthrough of the formula that you can use to help you calculate the reduction for your benefit before FRA:

Let’s run an example. An individual born in 1955, so his FRA is 66 years and 2 months. His PIA is $2,000, and he intends to file for benefits at age 64 years and 6 months.

Now let’s adjust the example so that it uses the additional factor. Same individual as above, but now he plans to retire at age 62 years and 8 months.

Now let’s look at how applying after FRA works.

After FRA

For every month after FRA that you delay applying, your benefit will grow by a factor. For folks born in 1943 and later, the factor is 2/3 of a percent, or roughly 0.6667%. If you were born in 1941 or 1942 (earlier years don’t matter at this point, you’re already 70), the factor is 15/24 of a percent, or approximately 0.625%. These factors equate to 8% per year for those born in 1943 or later, or 7.5% per year for those born earlier.

Here’s a formula to use to help calculate the delay factor and benefit amount for your situation:

Let’s run through an example. The individual from above, with a FRA of 66 years and 2 months, and a PIA of $2,000, decides to file for benefits at the age of 68 years and 6 months.

And that’s it.  Hope this has helped you to better understand how your PIA and your benefit are related.