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Q&A on Social Security benefits

WASHINGTON—President Bush's quest to change how Social Security is financed has raised questions about how the program's benefits are calculated and how Bush proposes to change that.

Q: How are my Social Security benefits set?

A: There are two main steps. First, when you retire, the Social Security Administration sets your primary insurance amount, or PIA. Then Social Security adjusts your PIA each year so it keeps pace with the rising cost of living.

Q: How does Social Security decide what my PIA is in the first place?

A: Fasten your seat belt: It's complicated.

First, the Social Security Administration adjusts, or "indexes," the amount you earned in each of the years you worked to reflect the increase in average annual wages since each of those years. Then it identifies the 35 years in which you earned the most.

Social Security's Average Wage Index has grown from $7,580 in 1973 to $34,064.95 in 2003, which means you'd need $34,065 in income in 2003 in order to have the same standard of living you got from the $7,580 you earned in 1973. Social Security does this to ensure that your future benefits reflect the rise in the nation's standard of living that's occurred while you were working.

Then the SSA adds all 35 years of your adjusted wages together and divides the total by 420, the number of months in 35 years. That produces what Social Security calls your "average indexed monthly earnings," or AIME.

Here's where it gets really complicated. In an effort to ensure that the poorest Americans get higher benefits relative to their incomes than richer Americans do, Social Security then takes your AIME and applies a complex mathematical formula to it.

It does so by applying up to three percentages to portions of your AIME. If you're retiring this year, Social Security will pay 90 percent of the first $627 of your AIME, 32 percent of the amount between $627 and $3,779 and 15 percent of any AIME above $3,779.

The sum of what you get from those three percentages is your basic benefit—known as the primary insurance amount, or PIA.

If you retired today with average annual earnings of $48,000, your AIME would be $4,000. Social Security would pay 90 percent of the first $627 of that, or $564; 32 percent of the next $3,152, or $1,009; and 15 percent of the last $221, or $33. Your PIA would be $1,606, but you would get less than that if you retired before the "normal retirement age," which is now 66.

Q: But the cost of living will keep rising after I retire. How does Social Security make sure my benefits keep pace?

A: The Social Security Administration will adjust your PIA each year to reflect the rising cost of living, as measured by the consumer price index, so your purchasing power doesn't shrink.

Q: How would President Bush change this?

A: President Bush favors "progressive price indexing." Congress would set income thresholds defining workers as low income, middle income or high income. Social Security would continue to calculate each worker's lifetime earnings, but it would change the way it calculates the AIME and the percentages that apply to the AIME.

The bottom 30 percent of workers, whose average annual earnings were less than about $25,000 in 2012, would still have their benefits indexed to changes in average national wage levels.

Middle-income workers—defined as those who earn between $25,000 and $118,000 in 2012—would have their career average earnings adjusted by a mixed index tied to both the growth in average wages and the growth in prices.

The index would be "progressive." The more a middle income worker earned, the more his or her benefits would be tied to annual increases in prices. The highest income workers would have their benefits tied exclusively to annual price increases.

Over the next century, prices are expected to grow 1.1 percent more slowly than wages each year, on average. So benefits for those who earned more would grow more slowly than those for low-income workers.

By 2055, that would mean that the PIAs, or starting benefits, for the top 70 percent of all retirees would be as much as 37 percent lower than they would be if the current system remained in effect.

Q: Isn't that a benefit cut?

A: Future benefits aren't guaranteed, but they are promised. Congress, however, has repeatedly changed benefits or revised how they're calculated. Bush's proposal would change the formula for calculating benefits, but they'd still grow annually—just less than they would under the current formula. Democrats call that a benefit cut. Republicans call it a cut in the growth rate of benefits.

If Congress makes no changes, by 2041 wage-tax revenues would cover only 74 percent of scheduled Social Security retirement benefits, according to the system's actuaries. Republicans call that a 26 percent benefit cut.

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For more detailed information, see the following Web site:

www.ssa.gov/OACT/solvency

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(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20050429 SOCIAL SECURITY

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