Washington, DC - The Question: 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 35-year 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%

      b.    Earnings between $885 and $3,556 are multiplied by 32%

      c.  Earnings above $3,556 are multiplied by 15%

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%)
• Bend point 2 =    854.72 ($3556 - 885 = $2671.  $2671 X 32% =   $854.72)
• Bend point 3 =    216.60  ($5000 - 3556 = $1444. $1444 X 15% = $216.60)

The PIA or Primary Insurance Amount comes to $1,867.00 (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% of their Social Security subject to taxation also serves to balance the scales more toward lower income earners.  I'll take my coffee with cream, and no sugar, please.