Inflation adjustments to PIA in Social Security

[not2late2learn]

Once a PIA is established, how are inflationary changes in SS applied to a PIA?

Given the info below (which I think is correct, but would certainly appreciate commentary...):
1. Age 63 in 2011, with an earnings record of 35 years - each year of SS earnings known exactly, no more to be added.

2. AIME is calculated using the Index wages for each year (http://ssa.gov/oact/cola/AWI.html), and applying the Index Factor to each year of SS earnings. Given that "eligibility is at age 62" and "We always index and individual's earnings to the average wage level two years prior to the year of eligibility", the AIME is based upon indexing to age 60, and all subsequent years are indexed at 1.00 (at face value). Therefore, given a known set of earnings, once the indexing based upon age 60 occurs, no further indexing is done and the AIME is fixed "forever". (is this correct? If so, I don't see how AIME can change.)

3. Now the PIA is calculated using the "bend points" applied to AIME. The bend points are obtained based upon the year of eligibility, ie the year one turns 62. For 2010 (the year of elibility), the bend points are $761 and $4586 (chart here - http://ssa.gov/oact/cola/bendpoints.html). So my take is that the bend points are also fixed "forever". In this case, turning 62 in 2010 gives bend points of $761 and $4586, never to change. (again, is this correct?)

4. Example - AIME=$7000, eligibility year 2010 age 62, resulting PIA=$2271, calculated today at age 63.

Given all that, the AIME doesn't change and the bend points don't change. So calculated PIA can't change. Does this mean that the PIA will always be the same value ($2271), even at age 66, after 3 years of (possible) inflation. What am i missing? (I realize the PIA amounts are reduced or increased by fixed factors, based on taking SS early or waiting until after 66 - that's not the adjustment I'm looking for.)

Thank you for any insights......

[SamB]

My understanding is that the bend points are adjusted annually according to the wage index prior to you actually applying for the benefit. Once you begin receiving the benefit it will be adjusted based on a COLA calculation. If you do not begin receiving the benefit until age 66, then the break points in use in that year will be applicable to you. Here is a link providing the gory details, http://www.socialsecurity.gov/OP_Home/c ... APP-A.html

Sam

[RobertAlanK]

I may be wrong but I don't believe your assumption in #2 is accurate. While wages for work in years after turning 60 are not indexed, all years up to the year you turn 60 remain so and the index factors will change for each of those years. So I believe the AIME does change to reflect the increasing index salary/wage data for those years to age 60.

[not2late2learn]

RobertAlanK -- I've applied the annual indexing, using a table like this (shortend, not showing all early years)

Code: Select all

YearAvg ind Wages	Index Factor	Age
2002	33252.09	1.2431	54
2003	34064.95	1.2134	55
2004	35648.55	1.1595	56
2005	36952.94	1.1186	57
2006	38651.41	1.0694	58
2007	40405.48	1.0230	59
2008	41334.97	1.0000	60
2009	40711.61	1.0000	61
2010	41673.83	1.0000	62

My assumption is keyed to the year 2008 (age of 60, per the rule of 2 yrs before eligible) and all the previous years are indexed to that value of 41334.97. So I don't see how the year of indexing would change in future evaluations?

[ThePrune]

not2late2learn,

About a year ago I too decided that I wanted to understand the SS benefit calculation. So I studied the online handbook and created an Excel spreadsheet to replicate the AnyPIA.exe calculation. Naturally the spreadsheet calculation didn't match AnyPIA.exe at first because there were details of the calculation I had not fully understood. But once I got all the details incorporated into the spreadsheet, it exactly replicated AnyPIA.exe.

Lesson: If you REALLY want to know that you understand the SS benefit calculation, write a program to replicate AnyPIA!

Your (2) - AIME isn't fixed forever unless 35 years of maximum SS earning are all in the past. But if worker has no further SS earnings after age 60 [your assumption(1)], then you're correct.

Your (3) - Yea, the Bend Point dollar amounts get fixed forever at age 62, or until Congress once again changes the formula. There ARE talks to do so, but nothing I'd yet classify as serious.

Your final paragraph - SS Admin in all their formal calculations assumes NO future inflation and NO future AWI increase. So all SS Admin calculations for future PIA are as you stated - no change in projected PIA from future age 62 to future FRA. But if CPI-W does increase, the SS Admin will simply recalculate the PIA by incorporating the COLA factor.

By the way, by law the COLA adjustment can never cause a decrease in benefits, but the AWI can drop and cause a reduction in AIME and Bend Point dollar amounts. This happened in 2009 when AWI dropped to $40,711.61 from $41,334.97 the previous year.

[not2late2learn]

ThePrune - thank you for clarifying - Since the SS earnings and contributions have ended, I do indeed have a fixed set of 35 year earnings, all in the past. And the bend points are predefined and will not change, assuming no congressional changes. So my PIA is fixed, no matter whether I calculate it today, next year or in 2014.
But your comment "But if CPI-W does increase, the SS Admin will simply recalculate the PIA by incorporating the COLA factor" - not sure what you mean? If there are annual CPI-W increases of (say) 5%, 10% and 15% in the next 3 years, my PIA would be adjusted by the multiple of 1.05*1.10*1.15?

That is exactly what I am doing is making a simple PIA calculator from excel. I can replicate the Online Calculator so far. But it was playing with it that I came up with the question regarding inflation adjustments to PIA. Thank you.

[ThePrune]

ThePrune - But your comment "But if CPI-W does increase, the SS Admin will simply recalculate the PIA by incorporating the COLA factor" - not sure what you mean? If there are annual CPI-W increases of (say) 5%, 10% and 15% in the next 3 years, my PIA would be adjusted by the multiple of 1.05*1.10*1.15?

Fundamentally, YES, your PIA would be adjusted upward by the COLA multiples, but only until the date of entitlement. After entitlement your monthly benefit receives the adjustment.

If you haven't already "jumped down the rabbit hole" into POMS, it's probably time. The COLA adjustment for PIA can probably be found referenced in several spots, but here's the one I found first: RS 00605.005 Benchmark Year (Eligibility Year). Scroll down to C.3.COLA's for the rule I cited above.

[Parthenon]

You may find this worksheet at the Social Security website interesting.

http://www.ssa.gov/policy/docs/statcomp ... 0/apnd.pdf

Ed

[not2late2learn]

Thank you both - that explains it. The POMS rabbit hole is quite a place, a dark alley best avoided without defenses.

For others looking to calc AIME and PIA, its not that difficult to obtain with reasonable accuracy (but may not match SS calcs):
- need your annual SS earnings for each year (see old mailed statements)
- make an excel sheet - Columns for Year, Age, SS Earnings, Index Wages, Index Factor, Indexed Earnings
- for the year of birth, age=0
- Index Wages per year from the link in my first post, using SS standard Index Wages
- Compute Index Factor for each year:
---- Year in which you turn 60, Index Factor is 1.000, same for all subsequent years
---- Year you are 59, Index Factor is (index Wages in year you are 60) divided by (index Wages in year you are 59)
---- Year you are 58, Index Factor is (index Wages in year you are 60) divided by (index Wages in year you are 58)
---- Repeat backwards for all years in which you have SS earnings (see sample chart in my second post above)
- Compute Indexed Earnings by multiplying each yearly SS earnings by the yearly Index Factor
- Find the highest 35 years of Indexed Earnings (sort, count, eyeball, whatever works for you)
- Sum the highest 35 years. If less than 35 years, sum all.
- Divide by 420 (35yrsx12mo/yr)
- Result is AIME - Average Indexed Monthly Earnings.
Once you know your earnings and you are over 60, this is not going to change if you have no more earnings. You can use the excel sheet to determine the effect of additional earnings by eliminating years with lower value Indexed Earnings (if additional earnings are greater than any of the old Indexed Earnings). This was the most enlightening to me when I did it for my spouse's future earnings.

Calculate PIA using the bend points from the chart in my first post above. Use the bend points for the year you are 62. Again, once you are 62, the bend points will not change, thus your (nomimal?) PIA will not change (assuming the AIME doesn't change). From 63 on, PIA may increase by the amount of inflation applied to SS each year. Gobs of rules about rounding, etc, but I'm not accounting for those in my simple model.

This was fun, and it may be over simplified, but it is enlightening. Thanks again for the contributions.

[BruceM]

Not2late
I haven't looked yet, but can you download each year's wage inflator into an excel ss, so that I don't have to manually type it in 35 times?

BruceM

[not2late2learn]

BruceM - surely you jest A govt department doing something that would make things "just a little bit easier" or useful to the population at large. No, I haven't seen the Indexed Wages on an excel sheet....... But I did do a copy/paste from the webpage (http://www.ssa.gov/oact/cola/AWI.html) into an excel sheet and it ended up reasonably formatted, need to rearrange into one column. Or you can PM me and I will send you a copy. Might be the weekend before I can get to it. Have fun!

[moneyover55]

All, I have posted a step by step example of these calculations at About.com MoneyOver55 at: http://moneyover55.about.com/od/socials ... enefit.htm

Your input and posts were useful.

[sscritic]

Your "step-by-step" guide says nothing about how to apply the Cola to the PIA. You also don't even mention the rounding rules, so your example PIA is wrong: $2029.74 is an impossible PIA.

[moneyover55]

I will fix the rounding rules. Thank you.

The COLA is applied to the PIA in Step 4 at: http://moneyover55.about.com/od/socials ... efit_4.htm

It says, "The potential increases based on a 3% inflation rate are shown in the example above in the right side in the Benefit Amount in Future Dollars column."

What additional explanation would you suggest?

[sscritic]

That's benefit, not PIA. They aren't the same thing because there are different rounding rules. A 3% cola could result in a 3.03% increase in benefits or a 2.98% increase depending on the starting PIA.

[moneyover55]

You are brutal. It's great!

I have changed some labels, added a few lines for the inflation adjustment, and added text that says, "(Technically your PIA is calculated, rounded to the next lowest dime, then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Then any increases or decrease based on age are applied, and any deduction for Medicare premiums are applied. That number is then rounded down to the next lowest dollar. Some of this is covered in the next step.) "

Technically my example in how inflation may affect your benefit is not done in the right order (I apply inflation to the PIA after the early/late reduction or increase has applied). I know this is not correct, but for the sake of what I needed to accomplish, and for the average reader (which you are certainly not) it was sufficient.

[sscritic]

You are brutal. It's great!

I have changed some labels, added a few lines for the inflation adjustment, and added text that says, "(Technically your PIA is calculated, rounded to the next lowest dime, then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Then any increases or decrease based on age are applied, and any deduction for Medicare premiums are applied. That number is then rounded down to the next lowest dollar. Some of this is covered in the next step.) "

Technically my example in how inflation may affect your benefit is not done in the right order (I apply inflation to the PIA after the early/late reduction or increase has applied). I know this is not correct, but for the sake of what I needed to accomplish, and for the average reader (which you are certainly not) it was sufficient.

I understand you have to write for your audience, but you had said you had given a "step-by-step" set of instructions and wanted feedback. Not that you should put it in your write up, but Medicare B is deducted before the dollar rounding, but Medicare D is deducted after the rounding, which is why some people get benefits that are not whole dollars. Also, if you have federal tax withheld, it is a fixed percentage of the benefit after all the previous deductions, but is then rounded down to the next lowest dime. That rounded withholding is then subtracted to get the final payment that shows up in your checking account (the withholding of course shows up in your account at the IRS, so technically doesn't change your benefit).

[beardsworth]

Can anyone translate this thread into plain (very plain) English, i.e., the significance of this subject and the alphabet soup in the earlier posts?