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A lot of people these days believe they’ll receive little or nothing from Social Security. They’ll hear otherwise from Social Security, which will provide statements of estimated benefits to those who request. Most workers who are age 60 or over are mailed the statements each year, whether they ask for them or not.
Beginning in 1999, the Social Security Administration mailed each worker a statement annually. The practice was curtailed when SSA decided preparing and mailing the statements was too expensive. No statements were mailed in 2011, and the mailings were off and on for a few years. The current policy is for written statements to be mailed annually to everyone who is eligible for benefits and is age 60 or older, unless the person registered on the Social Security web site for a mySocialSecurity account.
Of course, regardless of age you should obtain and review the statement periodically to ensure the earnings history is accurate. The earnings history determines the amount of benefits you’ll be paid.
When making retirement plans, the key part of the statement contains the estimates of future benefits. There’s an estimate of the monthly benefit you’ll receive at full retirement age and estimates of benefits payable at age 62 and age 70 if you claim at those ages.
There are other benefits estimates on the statement, but those are the key ones for retirement planning.
While the benefit estimates are helpful, they are based on assumptions. Some of the assumptions are of questionable accuracy and reasonableness. The assumptions seem to be made to ensure the estimates are conservative, or as low as possible. In fact, some analysts contend the Social Security Administration deliberately understates benefits in the estimates, perhaps to encourage people to save more or to dampen expectations in case benefits have to be reduced.
The assumptions used for economic growth and wage inflation in particularly are low. These assumptions understate benefits, because your earnings history is indexed, or inflated, for wage growth during your lifetime before the earnings are used to calculate your benefits.
When you’re nearing or beyond retirement age, SSA estimates your benefits based on your earnings history as of age 62. Let’s say you’re 65 and considering whether to claim benefits now or wait until later, perhaps as late as age 70. The benefit estimates won’t include the earnings after 62. The difference in your benefits could be substantial if these are higher-earnings years that are knocking low-earnings years out of your highest 35 years that are used to calculate benefits. You won’t know what the real benefit is until after actually applying to receive benefits.
Another earnings assumption is that you’ll continue to receive essentially the same earnings for the rest of your career through age 62, indexed for inflation, as reported in your latest year. That significantly understates the benefits of some workers who will benefit from promotions or job changes that will increase their earnings more than simple inflation. On the other hand, the assumption overstates the benefits of workers who leave the work force, whether voluntarily or involuntarily, either temporarily or for the long term.
The estimates also assume there are no annual inflation increases in Social Security benefits. In other words, they assume no inflation.
The bottom line is that the annual benefit estimates you receive are ballpark numbers to work with, but they aren’t numbers you can take to the bank. Of course, the more years you are away from retirement, the less accurate the estimates will be.
The especially bad consequence of these conservative estimates is that in many cases they understate the advantages of delaying benefits until full retirement age or later. That’s especially true of people who would continue to earn income after age 62 exceeding earnings of earlier years in their careers. Only your 35 highest-earning years are used to compute retirement benefits. Relatively high-earning years after age 62 can knock out lower-earning years from earlier in a career and increase retirement benefits.
Many people planning their retirements never know the true potential increase in their Social Security benefits from the combination of delayed retirement credits from waiting to claim benefits and higher-earning years after age 62 that knock lower-earning years out of their 35 highest-earning years.
Despite the criticisms of SSA’s annual benefit estimates, you can obtain better estimates through SSA. You do this by registering on SSA’s web site for a mySocialSecurity account. Once you log in to that account, you have access to a retirement benefits estimate calculator that is tied directly into your current earnings history and, if you want, the earnings history of your spouse. This calculator will give you more accurate estimates, because of the updated earnings history. But it still will have potentially-inaccurate assumptions about future earnings and inflation. The calculator also will estimate benefits under different scenarios you create. It’s worth the time to register and obtain estimates from the calculator.
Private firms also offer software that will generate benefit estimates under different scenarios and using estimates different from the official Social Security estimates.