When the Social Security Administration announced the Cost of Living Adjustment (COLA) for 2014, this also allowed for calculation of the bend points for 2014.
Bend points are the portions of your average income (Average Indexed Monthly Earnings – AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series. They’re called bend points because they represent points on a graph of your AIME graphed by inclusion in calculating the PIA.
If you’re interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA. Here, however, we’ll go over how Bend Points are calculated each year. To understand this calculation, you need to go back to 1979, the year of the Three Mile Island disaster, the introduction of the compact disc and the Iranian hostage crisis. According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 – AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2014 bend points is from 2012.
With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085. Now that we know these two numbers, we can jump back to 2012’s AWI Series figure, which is $44,321.67. It all becomes a matter of a formula now:
Current year’s AWI Series divided by 1977’s AWI figure, times the bend points for 1979 equals your current year bend points
So here is the math for 2014’s bend points:
$44,321.67 / $9,779.44 = 4.5321
4.5321 * $180 = $815.78, which is rounded up to $816 – this is the first bend point
4.5321 * $1,085 = $4,917.32, rounded down to $4,917 – this is the second bend point
These bend points are then used to calculate your Primary Insurance Amount, or PIA. With your Average Indexed Monthly Earnings (AIME) figure, we take the first $816 and multiply by 90%. The amount between $816 and $4,917 is then multiplied by 32%. Any amount above $4,917 is multiplied by 15%. These figures are then added together, and the result is your PIA.
Now that we have the bend points, we also know what the maximum reduction for Windfall Elimination Provision (WEP) will be for 2014: it’s equal to 50% of the first bend point. So, if you’re subject to WEP reduction of your benefits, the maximum amount that your benefit can be reduced for 2014 is $408 – half of the first bend point.