What Are Bend Points And Means Test­ing?

Riverbank News - - PERSPECTIVE - The in­for­ma­tion pre­sented in this ar­ti­cle is in­tended for gen­eral in­for­ma­tion pur­poses only. The opin­ions and in­ter­pre­ta­tions ex­pressed in this ar­ti­cle are the view­points of the As­so­ci­a­tion of Ma­ture Amer­i­can Cit­i­zens Foun­da­tion’s So­cial Se­cu­rity Ad­vi­sory

Dear Rusty: I was hav­ing cof­fee with sev­eral of my neigh­bors the other day, and the long-term fi­nan­cial health of So­cial Se­cu­rity came up. With all of the me­dia cov­er­age of the pro­gram run­ning out of re­serves in a few years, the is­sue of “means test­ing” for ben­e­fits came up as a par­tial so­lu­tion to the fore­casted short­fall. This sounds to me like some­thing that should be con­sid­ered, but then some­body men­tioned that So­cial Se­cu­rity is al­ready means tested, and he men­tioned tax­a­tion and some­thing called “bend points.” Now, I’m re­ally con­fused! Can you ex­plain? Signed: Mixed up

Dear Mixed: Wow, you and your neigh­bors get into some pretty deep topics over cof­fee, but let me try to clar­ify. At its most ba­sic level, a means test is “a de­ter­mi­na­tion of whether an in­di­vid­ual or fam­ily is el­i­gi­ble for gov­ern­ment as­sis­tance, based upon whether the in­di­vid­ual or fam­ily pos­sesses the means to do with­out that help” (Wikipedia def­i­ni­tion). With this ba­sic def­i­ni­tion, it can’t re­ally be said that So­cial Se­cu­rity is “means tested” in a for­mal sense. In­di­vid­u­als and fam­i­lies with lev­els of wealth and in­come far above av­er­age lev­els can – and do – qual­ify and re­ceive So­cial Se­cu­rity ben­e­fits based on their con­tri­bu­tions to the pro­gram dur­ing their work­ing years.

But re­al­is­ti­cally, the cal­cu­la­tion of ac­tual ben­e­fits does take into ac­count wealth and earn­ings, at least in­di­rectly. This is where the “bend points” your friend men­tioned come into play. The de­ter­mi­na­tion of an el­i­gi­ble re­cip­i­ent’s So­cial Se­cu­rity monthly ben­e­fit (re­ferred to as the “Pri­mary Insurance Amount” or PIA) in­volves a three step process:

1. The in­dex­ing of recorded earn­ings for a 35-year pe­riod. Us­ing the high­est recorded earn­ings, each an­nual fig­ure is in­dexed to bring the amount up to cur­rent val­ues. This is done us­ing a set of an­nual per­cent­ages de­vel­oped by the So­cial Se­cu­rity Ad­min­is­tra­tion to re­flect present val­ues of those earn­ings.

2. A monthly av­er­age for the 35year pe­riod is then cal­cu­lated. Af­ter in­dex­ing, the av­er­age monthly earn­ings amount for the 35-year pe­riod is sep­a­rated into three lev­els, called “bend points,” this way (dol­lar val­ues are for 2017): a. The first $885 is mul­ti­plied by 90 per­cent; b. Earn­ings be­tween $885 and $3,556 are mul­ti­plied by 32 per­cent; c. Earn­ings above $3,556 are mul­ti­plied by 15 per­cent.

The three amounts cal­cu­lated in the pre­ced­ing step are added to­gether to de­ter­mine the PIA.

3. Here’s an ex­am­ple, as­sum­ing a 35-year monthly earn­ings av­er­age of $5,000. Bend point 1 = $ 796.50 ($885 X 90 per­cent); Bend point 2 = 854.72 ($3556 - 885 = $2671. $2671 X 32 per­cent = $854.72); Bend point 3 = 216.60 ($5000 - 3556 = $1444. $1444 X 15 per­cent = $216.60).

The PIA or Pri­mary Insurance Amount comes to $1,867. (Monthly amount is al­ways rounded down to the near­est dol­lar)

I know th­ese com­pu­ta­tions can be mind-numb­ing, but the ex­am­ple above il­lus­trates that higher earn­ings get a lower weight­ing in de­ter­min­ing PIA ... not nec­es­sar­ily a “means test,” but a way of en­sur­ing that low wage earn­ers re­ceive a higher re­turn on their So­cial Se­cu­rity in­vest­ment. So although true means test­ing isn’t cur­rently a fac­tor in de­cid­ing a per­son’s ben­e­fit, weight­ing the bend point per­cent­ages higher for the lower dol­lar por­tions in the cal­cu­la­tion does, in fact, have the ef­fect of be­ing some­what less fa­vor­able to those with a higher av­er­age monthly earn­ings. By the same to­ken, the fact that peo­ple with higher ad­justed gross in­comes can find up to 85 per­cent of their So­cial Se­cu­rity sub­ject to tax­a­tion also serves to bal­ance the scales more to­ward lower in­come earn­ers.

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