Every soon-to-be retiree is curious about what their Social Security benefit might be when they retire – as they should be, because their expected benefit will shape their saving habits and retirement planning.
The Social Security Administration offers benefit estimates and calculators to determine a ballpark benefit figure. But how accurate are these estimates?
Laurence Kotlikoff answers this question in his latest column. He talks about the suspect accuracy of benefit estimates, why they are often low-balled, and how the inaccurate estimates can change your retirement plans.
Disclosure: Kotlikoff sells his own benefit estimation software.
Here’s what Kotilkoff has to say:
The Social Security Administration’s benefit online calculators aren’t to be trusted for use for people under age 60, even for someone who is single and was never married and will never marry. The reason is that unless you change their assumptions, they assume (in contradiction to the Social Security Trustees’ Report’s own assumptions) that the economy will experience zero economy-wide average real wage growth and zero inflation between now and the end of time. That’s an odd assumption for an economy that’s experienced positive average real wage growth rates as well as inflation for each of almost all the postwar years.
But it’s intentionally used to produce low-ball benefit estimates so people will save more on their own and they won’t be so hurt if the system’s benefits are cut in the future, which seems likely. According to table IVB6 of last year’s Social Security Trustees’ Report, the system needs an immediate and permanent 23 percent cut in all SSA benefits starting now and continuing forever to cover its long-term funding shortfall. And for those of you who think the system’s trust fund is real, this requisite 23 percent benefit cut does take into account all of the trust fund’s assets.
My company’s Social Security software, which is available for free in its basic version, corrects for Social Security’s low-ball estimates. Others may as well. The low-ball estimate problem is particularly nasty when trying to find the optimal strategy for a couple like your hypothetical one because the couple’s optimal joint strategy depends on having accurate projections for each spouse, and the bigger the age gap between the two, the bigger the bias will be in coming up with the accurate strategy if one doesn’t correct Social Security’s PIA estimates.
Photo by Castlebury via Flickr CC License
