When planning for retirement, one of the first things you need is your Social Security benefits estimate. The Social Security Administration usually mails you (and your spouse/partner) one, now every 5 years. Or, you could look it up at their Web site.
But the number Social Security gives you may not be reliable and low balls what you will actually receive. For example, when I ran the estimator, I got three numbers:
* Retirement benefit at age 62. Based on my current income, this is the lowest number because this is the earliest age at which one can take Social Security. It's not what the agency considers "full retirement" age, it's early retirement by their definition. That means they will discount the benefit until you reach...
* Full Retirement Age. This age depends upon when you were born and nets you a higher benefit than those drawing benefits at 62. For me, it's 66 and 6 months. In the last round of reforms in the 1980s, Congress pushed the full retirement age up a bit from 65 to allow for better funding of the system. See this calculator to see when you reach full retirement age.
* Retirement at 70. This is the maximum benefit, meaning Social Security pays you a bonus for delaying benefits. In my case, I can earn an additional $600 a month by waiting. The benefit at 70 (for me) is roughly double what it would be at age 62.
What's wrong with these estimates? They assume that I will earn the same amount of money I entered into the calculator until I take benefits. What if I earned more or less? What about inflation eroding my income in the interim? The calculator won't make allowances for that. I could actually qualify for a higher benefit.
According to Laurence Kotlikoff, an economics professor at Boston University, you need to know that Social Security's numbers could be off quite a bit. He doesn't trust their estimates. Here's what he had to say in a recent blog:
"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."
Why doesn't the government give you honest numbers? Are they lowballing for a reason? Here's Kotlikoff again:
"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."
While I take issue with Kotlikoff's assertion that the system "needs an immediate and permanent 23 percent cut," you should run some numbers that assume wage growth and inflation.
It's highly debatable what Congress will do to fully fund Social Security. At present, it's not in any immediate danger. And given the political volatility of messing with benefits, my guess is that they will eventually raise taxes to improve the system's funding before they cut payments.
I'm hardly Pollyannish about what needs to be done with Social Security and private retirement systems. Both need to be bolstered. I'd like to see Social Security benefits expanded and 401(k)s eliminated in favor of a universal, low-cost government-matched savings plan that is not linked to employment.
Having said that, I recommend software that's offered by a company run by Kotlikoff called ES PlannerBasic. It will allow you to do dynamic estimates that take into account changing income and spending scenarios. It also has a tool that will help you maximize your Social Security benefits.
John F. Wasik is a speaker, journalist and the author of Keynes's Way to Wealth: Timeless Investment Lessons from the Great Economist and 13 other books. He writes regularly on personal finance and investing for Reuters, The New York Times and Morningstar.com.
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