Transcript:

Hi everyone, today I want to talk about Social Security bend points. Specifically, what are they? And how do they work?

Before we dive into the specifics, it is probably helpful to think about how Social Security operates at a high level. Social Security is intended to provide a basic level of income. It is not intended to provide all of one’s income in retirement.

Like many government programs, it is designed to provide more benefits to those at the lower end of the income spectrum.

Think of it like taxes: With taxes, the lowest tax rates are applied to the lowest levels of income. With Social Security, the highest income replacement rates are applied to the lowest levels of income.

Let’s look at an example. In 2021, if we wanted to determine what someone’s Primary Insurance Amount (or PIA) is (PIA refers to their benefit amount at Full Retirement Age) we would do that by applying the bend points to their “Average Indexed Monthly Earnings” (or AIME, for short).

I will cover how to calculate AIME in a separate video, but, for now, let’s just assume someone’s income was at or above the maximum level for Social Security taxation from age 22 to 62, and, as a result, their AIME was the maximum level possible in 2021 of $11,098.

To calculate their Primary Insurance Amount, we’ll take the first $996 * 0.90, then the next $5,006 * 0.32, and then finally the remaining $5,096 * 0.15.

In other words, the first roughly $1,000 of income is replaced at a rate of 90%, the next roughly $5,000 is replaced at a rate of 32%, and the final roughly $5,100 is replaced at a rate of 15%. 

And, if we actually do the math here, we find that the maximum PIA for a wage earner who turned 62 in 2021 would be $3,262.72. And this is the process you would follow to calculate any PIA. You would start with the AIME, multiply it by the replacement rate within each tier, and then arrive at the full retirement age benefit amount.