Social Security benefits are probably going to be one of your key sources of retirement income, so it can be helpful to understand a little bit about how your benefit amount is determined, and to know the amount of money you're likely going to get from the Social Security Administration when you retire.
If you're trying to figure that out, one of the key things to know is how the calculation used to determine your benefits changes from year to year. In particular, here's what's going to happen to it in 2021.
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Social Security is going to change a little bit in 2021
First things first: The actual formula used to determine your standard benefit (called your primary insurance amount) always stays the same. The Social Security Administration adjusts your wages for inflation, figures out your average monthly wage during the 35 years your inflation-adjusted wages are highest, and provides you with benefits equaling a percentage of that average (which is called your AIME, or averaged indexed monthly earnings).
Specifically, you'll get benefits equaling:
- 90% of your AIME up to a first "bend point"
- 32% of AIME between the first and second "bend point"
- 15% of your AIME above the second bend point
Bend points are income thresholds. And that's where the change comes in. The "bend points" are going up next year -- as they do in most years. Specifically, the first bend point is going up from $960 in 2020 to $996 in 2021, and the second is going up from $5,785 to $6,002.
Next year's bend points will apply only to a limited group of retirees. That's because the bend points used to determine your benefits are those in effect during the year you turn 62. Those who turned 62 in 2020 received 90% of AIME up to $960; 32% of AIME between $960 and $5,785; and 15% of AIME above $5,785. But those who turn 62 in 2021 will receive 90% of AIME up to $996; 32% of AIME between $996 and $6,002; and 15% of AIME above $6,002. Those who turn 62 in 2022 will likely see even higher bend points, and so on each year.
These bend points are important, because they make the Social Security formula progressive. Lower earners get a larger percentage of their average wage replaced than higher earners do. But it's also important that they go up each year to keep pace with inflation -- otherwise, lower earners wouldn't get a large enough percentage of their income. In 1979, for example, the bend points were $180 and $1,085, which means that average benefits would be a whole lot smaller for the vast majority of Americans with an average wage of more than $180 per month.
Of course, while the bend points are going up, there are still many workers who won't get benefits equaling 90% of all of their career-average wages, since there are many people with an average above $996. While it's important for every American to have supplementary savings to live on in retirement in addition to their Social Security benefit, those with higher average wages see a smaller percentage of their total income replaced . They must take that into account when setting their retirement savings goals.
