Social Security and Bend Points

Social Security and Bend Points

After taxes, one of my goals for President’s Day Weekend was to take a look at our Social Security numbers.  I’ve said before that I am not counting on Social Security when we retire.  The Social Security and Medicare Boards of Trustees put out a report in 2017 saying the following:

After 2021, interest income and redemption of trust fund asset reserves from the General Fund of the Treasury will provide the resources needed to offset Social Security’s annual deficits until 2034, when the OASDI reserves will be depleted. Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2091. The ratio of reserves to one year’s projected cost (the combined trust fund ratio) peaked in 2008, declined through 2016, and is expected to decline steadily until the trust funds are depleted in 2034.

If life has taught me anything, it is that statements like that are overly optimistic, and so I expect a worse outcome than that.  But who knows, maybe they’ll surprise me 🙂

Moreover, I have personally been dreading looking at my Social Security numbers.  I didn’t think they would be very good.  Indeed, I have a 9 year gap from when I was in graduate school and when I couldn’t get a job during the Great Recession.  My graduate school offered me a teaching arrangement – it was why I went to the school that I did.  The deal was that I could attend graduate school without having to pay for classes (although books, living, etc. were my responsibility), I’d get health care, and I’d get a stipend (below the poverty line).  In return I taught classes and was a TA, and more importantly, I couldn’t get another job – I was supposed to be 100% invested in my education.  But no Social Security was withheld on my stipend and the free classes didn’t count as income.  So those years are all 0’s as far as Social Security is concerned.

The bottom line:  I had my first job 19 years ago.  Since then, 9 of those years had no income for Social Security.  The remaining years certainly didn’t have huge numbers, so even though I’ve now hit the 10 year threshold to be eligible for Social Security earnings, I didn’t have high expectations that the benefit would result in much.

But we took the plunge and signed up at the Social Security website.  We watched their video (below), and I have to say “Bravo Social Security – Well Done”.  The Social Security website is probably the best government website I have ever visited, and I was pleasantly surprised.  It was straightforward and easy to use, and it definitely helped assuage my initial reluctance to go through it.

After signing up, I got my history of earnings and they give an amount one can expect at retirement.  That is a curious estimate, and so I wanted to learn more.

Going through the raw calculations will certainly be the most accurate way to estimate one’s benefits, and this pdf at the Social Security website helps do that in a straightforward way.  But the concept of “Bend Points” just doesn’t jump out at me from the basic worksheet even though it is there.  It only really hit me after reading the Physician on Fire blog post about it, and the explanation in that blog is the best description I’ve found.  I’d highly suggest reading it, but I summarize it as so:  Making more income results in diminishing returns in terms of Social Security benefits.

There are 3 bend points.  As described in the blog (adjusting the numbers for 2018 as given in the Social Security pdf):

You get 90% of your AIME up to the first bend point (at an AIME of $895 in 2018)

You get 32% of your AIME between the first and second bend points (portion of AIME between $885 and $5,397 in 2018)

You get 15% of your AIME beyond the second bend point (AIME above $5,397 in 2018)

With that said, I wondered if I had even reached the end of the first Bend Point.  So I set forth to figuring that out.  Using the PDF, it turns out my AIME is $1,197.58.  So I have made it past the first bend point!  Woohoo!!!  Finishing out the calculation, if I didn’t make any more income and I started collecting Social Security benefits at 67, my estimated monthly payment currently is $902.32.  Maybe not great, but much better than I expected.

As an interesting note, even if one makes the maximum Social Security contribution each year, it will take about 17 years for one to go from the first Bend Point to completing the second.  We haven’t sat down yet to seriously try to figure out exactly what year we may want to try to retire if we did so early, but I think knowing this will definitely come in handy.  I don’t count on it, but it’s something to think about too.

Also, I did the same calculation for Sarah’s Social Security, and her AIME is currently $2,082.72.  She is definitely kicking my butt.  I’m not sure I can even catch up to her as far as Social Security goes, and even if I did it would be somewhere after my 60’s and close to normal retirement.  Sarah worked through college, and went full time afterward and managed to keep her job through the Great Recession.  So the effect of my going to graduate school and not having much income then, in addition to having no job during the Great Recession is pretty clear in comparison.

That’s maybe a hard truth I can appreciate now, and if there is a lesson in that, it would be to carefully consider the return value of a given education.  Considering my current job has nothing to do with my degree and I couldn’t find my desired job after school (I wanted to be a college math professor), I’ve thought a lot about whether my graduate degree was worthwhile.  Going by the cold hard numbers, it doesn’t look like it.  Maybe that could be a topic of another post…

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