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.
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