Mark Miller: Navigating your Social Security statement
The Social Security Administration will be mailing annual benefit statements for the first time in three years to some American workers. That’s good news, because the statements provide a useful projection of what you can expect to receive in benefits at various retirement ages, if you become widowed or suffer a disability that prevents you from working.
But if you do receive a statement next month, it is important to know how to interpret the benefit projections. They are likely somewhat smaller than the dollar amount you will receive when you actually claim benefits, because they are expressed in today’s dollars — before adjustment for inflation.
That is a good way to help future retirees understand their Social Security benefits in the context of today’s economy — both in terms of purchasing power, and how it compares with current take-home pay. “For someone who is 50 years old, this approach allows us to provide an illustration of their benefits that are in dollars comparable to people they might know today getting benefits,” says Stephen Goss, Social Security’s chief actuary. “It helps people understand their benefit relative to today’s standard of living.”
In part, the idea here is to keep Social Security out of the business of forecasting future inflation scenarios in the statement that might — or might not — pan out. The statement also provides a starting point for workers to consider the impact of delayed filing.
“It provides valuable information about how delaying when you start your benefit between 62 and 70 will increase the monthly amount for the rest of your life — an important fact for workers to consider,” says Virginia Reno, vice president for income security at the National Academy of Social Insurance.
Unfortunately, the annual statement is silent when it comes to putting context around the specific benefit amounts. The document’s only reference to inflation is a caveat that the benefit figures presented are estimates. The actual number, it explains, could be affected by changes in your earnings over time, any changes to benefits Congress might enact, and by cost-of-living increases after you start getting benefits.
And the unadjusted expression of benefits can create glitches in retirement plans if you do not put the right context around them. Financial planners don’t always get it right, says William Meyer, co-founder of Social Security Solutions, a company that trains advisers and markets a Social Security claiming decision software tool.
“Most advisers do a horrible job coming up with expected returns. They choose the wrong ones or over-estimate,” he says, adding that some financial planning software tools simply apply a single discount rate (the current value of a future sum of money) to all asset classes: stocks, bonds and Social Security. What’s needed, he says, is a differentiated calculation of how Social Security benefits are likely to grow in dollar terms by the time you retire, compared with other assets.
“Take someone who is 54 years old today — and her statement says she can expect a $1,500 monthly benefit 13 years from now when she is at her full retirement age of 67,” says William Reichenstein, Meyer’s partner and a professor of investment management at Baylor University. “If inflation runs 2 percent every year between now and then, that’s a cumulative inflation of 30 percent, so her benefit will be $1,950 — but prices will be 30 percent higher, too.
“But if I show you that number, you might think ‘I don’t need to save anything — I’ll be rich.’ A much better approach for that person is to ask herself if she can live on $1,500 a month. If not, she better think about saving.”
About those annual benefit statements: the Social Security Administration stopped mailing most paper statements in 2011 in response to budget pressures, saving $70 million annually. Instead, the agency has been trying to get people to create “My Social Security” accounts at its website (1.usa.gov/1d3xvuZ), which allows workers to download electronic versions of the statement.
The move prompted an outcry from some critics, who argue that the mailed statement provides an invaluable reminder each year to workers of what they can expect to get back from payroll taxes in the future.
Hence the reversal. Social Security announced last spring that it is re-starting mailings in September at five-year intervals to workers who have not signed up for online accounts. The statements will be sent to workers at ages 25, 30, 35, 40, 45, 50, 55 and 60.
Mark Miller is a columnist for Reuters.