When the Social Security Administration recently announced that the maximum wage base and the Cost-of-Living Adjustment (COLA) would remain unchanged for 2016, they also announced the bend points that are used to calculate both the Primary Insurance Amount (PIA) for Social Security benefits. In addition, the Family Maximum Benefit (FMax) bend points for 2016 were also announced.
Wait a second! You may be wondering just why the bend points are changing when there was no increase to the COLA? Excellent question, as it shows you’ve been paying attention. This is because the bend points are based upon the Average Wage Index, which adjusts annually regardless of whether the numbers go up or down, whereas the COLA and the maximum wage base only goes up. Bend points can go down from one year to the next – it’s only happened once, in 2009, but it could happen again. For more on how the bend points are determined, you can read this article: Social Security Bend Points Explained.
Primary Insurance Amount Bend Points
The bend points for calculating individuals’ Primary Insurance Amounts (PIA) for 2016 will be $856 and $5,157. These are used to calculate your PIA from your Average Indexed Monthly Earnings (AIME). The SSA indexes your lifetime earnings and takes the top 35 years, dividing by 420 (the number of months in 35 years). The bend points are then applied to determine your PIA. An example would be – if your AIME calculates to $5,500, then
The first $856 is multiplied by 90% = $770.40
The difference between $5,157 and $856 is multiplied by 32% = $1,376.32
The excess above $5,157 is multiplied by 15% = $51.45
The Primary Insurance Amount (PIA) is the sum of these three – $770.40 + $1,376.32 +$ 51.45 = $2,198.13, rounded to $2,198.10.
Family Maximum Benefit Bend Points
When calculating the FMax benefit amount, the bend points for 2016 are now set as well. These points are $1,093, $1,578, and $2,058. These bend points are also applied to your PIA to determine the maximum amount of benefits that can be paid based upon one individual’s record – such as Spousal Benefits, Survivor Benefits, and other dependents’ benefits. Continuing with our example from above, where we calculated the PIA for this individual to be $2,198.10,
The first $1,093 is multiplied by 150% = $1,639.50
The difference between $1,578 and $1,093 is multiplied by 272% = $1,319.20
The difference between $2,058 and $1,578 is multiplied by 134% = $643.20
The excess above $2,058 is multiplied by 175% = $245.18
The results are summed up ($1,639.50 + $1,319.20 + $643.20 + $245.18 = $3,847.08 rounded down to $3,847.00) to produce the FMax benefit amount. For the individual with the PIA of $2,198.10, the maximum amount that can be paid based upon this record is $3,847.00.
WEP Maximum Impact
From the first bend point we also determine the maximum impact that the Windfall Elimination Provision (WEP) can have for an individual reaching age 62 in 2016. Since the maximum WEP impact is 50% of the first bend point, if you will be 62 in 2016 the maximum dollar amount of WEP impact for reducing your PIA is $428 (50% of $856).
Sterling Raskie, MSFS, CFP®, ChFC®
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