Question: How Accurate Are Social Security’s Benefit Estimates?
Answer: Social Security used to send annual statements showing us they had correctly credited our past covered (taxable) earnings. Then in 2011, to save money, they stopped sending the statements. Now they are starting to send them again, but only to some of us and, at most, every five years. This said, we can go to Social Security’s website, at any time, to retrieve our benefit statements.
I recommend that you retrieve your statement each year and check that Social Security has correctly credited your covered earnings. But don’t trust the statement’s projection of your retirement benefits or the benefits available to family members based on your work record. For many, if not most workers, the projection is wrong. It’s wrong for four reasons.
First, Social Security assumes no future economy-wide growth in average wages. In so doing, it assumes no change in the future covered earnings ceiling or the “bend points” (dollar amounts) in Social Security’s full retirement benefit (PIA) formula.
Second, Social Security assumes no future inflation.
Third, Social Security benefit statements assume you work right up to the point you begin taking your retirement benefit.
Fourth, the benefit statements assume you earn the same amount, in today’s dollars, every year that you work in the future.
(By the way, there’s nothing in the benefit statement that acknowledges these first two assumptions. Nor is there any such acknowledgement provided when using Social Security’s Quick Calculator.)
The first two assumptions produce understatements of our future retirement benefits. The third assumption produces overstatements of our retirement benefit. The fourth assumption can produce both under or over estimates.
How big is the bias? This depends on your age, how much you will earn through age 60, and how much you will earn after age 60. But it’s easy to construct examples, using Social Security’s Quick Calculator, in which your retirement benefit is under or overstated by 20 percent.
For those who are married, using Social Security’s benefit estimates can wreak particular havoc on your optimal Social Security collection strategy. If you and your spouse differ in age or have different levels of future earnings, your benefit levels will be differentially biased and you can come up with the wrong benefit collection strategy — one that leaves money on the table.
Whether this happens will depend on what software program you use to calculate your optimal strategy. A proper program will not let you enter a retirement benefit estimate if you have future covered earnings for fear of the source of that estimate. And if you don’t have future covered earnings, it will correct Social Security’s retirement benefit estimate to account for future average wage growth and inflation.
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