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Demystifying Social Security Disability Insurance (SSDI): Calculating Benefits from Past Wages after the Finding of Disability

The following post is part of our Law Student Blog Writing Project, and is authored by Thomas Rovito, who is pursuing his Juris Doctorate at the Ohio State University.

The Social Security Administration (SSA), which has local offices in Cincinnati, Ohio and Florence, Kentucky, publicized in its report Disability Benefits that “a 20-year-old worker has a 1-in-4 chance of becoming disabled before reaching full retirement age.” This imperative displays the need to demystify the byzantine process of the calculation of benefits from past wages after the finding of disability through the SSDI formula from 42 U.S.C. § 415. This article details SSA and third-party resources on calculating SSDI benefits, as well as the fundamentals of calculating SSDI benefits.

Fortunately, the SSA has created a benefit calculator to expedite the math. In addition, my Social Security provides online statements to “show” the SSA’s work. The Congressional Research Service has produced white papers on this topic. In addition, legal self-help companies and newspapers, such as Nolo and the Washington Post, have simplified the SSDI benefit process.

But for those wanting to explore the process further into the actuary tables and formulas from the Social Security Handbook, this guide is designed to provide an overview on the fundamentals of the SSA benefit calculation process for SSDI. Please note that this article concerns the Title II SSDI program (for workers who have paid into Social Security over the course of their career), and not the Title XVI Supplemental Security Income (SSI) program (for disabled persons with limited assets).

Much like a high school algebra problem, the SSDI program calculation requires several steps, and can be best illustrated through hypothetical problems. The first step is to multiply the beneficiary’s nominal earnings by the yearly index factors to determine the beneficiary’s indexed earnings. The index factor settles at the flat rate of 1.0000 when the beneficiary is eligible for benefits, with the same rate applying to the two years before the beneficiary claimed eligibility. To find the index factor for previous years, divide the Average Wage Indexing Series (AWI – or the average wage for the year) when the beneficiary turned sixty by the AWI of the year of employment. The beneficiary would then multiple his nominal earnings by the index series to obtain his yearly indexed earnings.

Social Security Administration, Average Wage Indexing Series Graph

These concepts can be vividly illustrated through a hypothetical question (similar to two hypothetical illustrations by the SSA). Beneficiary (B) is eligible for SSDI benefits in 2018 at age sixty-two; thus, a flat rate of 1.0000 would apply as his index factor for 2017 and 2016. For previous years of employment, he would take the AWI from when he turned sixty by the AWI for his year of employment. B would then multiply his nominal earnings by the index factor for each year to determine his indexed earnings.

B’s Earnings from 2017-2012 (with Subsequent Years Omitted)
Formula: Nominal Earnings x Index Factor = Index Earnings
Index Factor = AWI of B at 60 / AWI of Year of Employment

The next step would be to calculate the “average indexed monthly earnings” (AIME). This amount is computed from the top thirty-five years of indexed earnings added together, and then divided by the number of months within the thirty-five years, or four hundred and twenty months. If the beneficiary worked for more than thirty-five years, only the thirty-five largest indexed earnings would count, and the other years would drop off from the calculation.

Returning to B in the hypothetical, let’s say he worked for forty-five years before suffering his disability. Only the largest thirty-five years of indexed income would apply. The largest thirty-five indexed income rates would be summed. This amount would then be divided by four hundred and twenty to yield the AIME.

Formula: (Largest 35 Index Earning Summed) / 420 = AIME
420 came from 12 (months) x 35 (years)

The third step is to use the AIME figure to assess the beneficiary’s primary insurance amount (PIA). The PIA formula is a function of the AIME, which is contingent on the year of first eligibility. The PIA formula will consist of bend points. The amounts for 2018 are:

  1. 90 percent of the first $895 of his/her average indexed monthly earnings, plus
  2. 32 percent of his/her average indexed monthly earnings over $895 and through $5,397, plus
  3. 15 percent of his/her average indexed monthly earnings over $5,397.

Using the numbers from the another SSA hypothetical, B, who was eligible and retired in 2018, has a AIME of $4,059, with the 2018 first PIA bend point of $895, and the PIA second bend point of $5,397. Cost of Living Allowance (COLA) does not apply.

.9 (First PIA bend point of eligible year) + .32 (AIME – First PIA bend point of eligible year) = Gross Monthly SSDI Calculation (truncated to the next lowest dime)
.9 (895) + .32 (4059 – 895) = $1,817.90 (truncated from $1,817.98)

On the other hand (again, using the numbers from another SSA hypothetical, B2, who was eligible in 2014, but did not take until 2018, would have access to COLA adjustments from 2014 through 2018. In addition, if B2 had an AIME of $9,144, the first 2014 PIA bend point of $816, and the second 2014 PIA bend point of $4,917, the respective calculation would be:

9 (First PIA bend point of eligible year) + .32 (Second PIA bend point of eligible year – First PIA bend point) + .15 (AIME – Third PIA bend point of eligible year) = Gross Monthly SSDI Calculation (truncated to the next lowest dime)
.9 (816) + .32 (4,917 – 816) + .15 (9,144 – 4,917) = $2,680.70 (truncated from $2,680.77).
The COLAs of 2014 through 2017 apply (1.7%. 0.0%, 0.3%, and 2.0%), which yield $2,788.90.
COLA x Gross Monthly SSDI Calculation = Modified Monthly SSDI Calculation
.04 x 2,680.70 = 107.28
107.28 + 2,680.70 = $2,787.90 (truncated from $2,787.93)

While this calculation yields the Gross Monthly SSDI Calculation, several other factors may impact this determination. For instance, there will be a deduction is the beneficiary is disabled before the Full Retirement Age (FRA) to the Gross Monthly SSDI Calculation. If the beneficiary has dependents, the Maximum Family Benefit (MFB) may trigger. According to the SSA, the MFB is “is the maximum monthly amount that can be paid on a worker’s earnings record.” This amount may not exceed:

  1. 150 percent of the first $1,144 of the worker’s PIA, plus
  2. 272 percent of the worker’s PIA over $1,144 through $1,651, plus
  3. 134 percent of the worker’s PIA over $1,651 through $2,154, plus
  4. 175 percent of the worker’s PIA over $2,154.

In addition to the fourth step of adjusting for these extraneous factors, it also important to consider the broader implications of claiming SSDI, including its impact on the beneficiary’s federal taxes, and the ability of the beneficiary to claim Medicare or Medicaid coverage. Moreover, SSDI benefits may become modified if the beneficiary returns to work, leaves the United States, has a change in marital status, has additional dependents, is convicted of a crime, or has a material change in income.

While the SSDI calculation may appear to be complex on its face, it may be analyzed as several step-by-step formulas. While the SSA does provide online statements and a benefits calculator, knowing the nuances of the formula, such as what constitutes the indexed income, AIME, and PIA, can empower you, and your attorney at Lawrence & Associates to make an informed and personally tailored decision about your SSDI benefits.

Lawrence & Associates has offices in West Chester, Ohio and Fort Mitchell, Kentucky. We’re Working Hard for the Working Class, and we want to help you!