Can You Trust Social Security's Estimate of Your Benefits?



ou may receive several conflicting estimates of your future benefits from Social Security. Photo courtesy of Justin Sullivan/Getty Images. Larry Kotlikoff's Social Security original 34 "secrets", his additional secrets, his Social Security "mistakes" and his Social Security gotchas have prompted so many of you to write in that we now feature "Ask Larry" every Monday. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Kotlikoff's state-of-the-art retirement software is available here, for free, in its "basic" version. Larry Kotlikoff: Depending on which Social Security source you use, you may receive very different answers to your request for an estimate of future benefits. Social Security has six different ways for us to come up with an estimate of our benefits. First, it provides a printed earnings statement with benefit estimates. Second, it has four online benefit calculators. Third, you can ask Social Security staff directly -- on the phone or in person -- for a benefit estimate. And in each case, you'll get a number, but the numbers may vary and you'll have no idea what they mean. Take the printed earnings statement, which presents your earnings history and lays out its assumptions about your future earnings. But in presenting the retirement benefits you can collect starting at different ages, the statement doesn't say whether the amounts are shown in today's dollars or in dollars of the years in which you'll start collecting. In other words, it doesn't say whether the inflation adjustment -- the consumer price index (CPI) cost-of-living adjustment (COLA) -- between now and the particular collection year is being included. Nor does it say whether the benefit estimate is taking into account projected real wage growth, which, if you are under age 60, will affect the degree of wage indexation of your past Social Security-covered earnings. Likewise, if you call or visit your Social Security office, they will give you benefit estimates but won't tell you what dollars they are quoting your benefits in or whether they are assuming economy-wide real wage growth. The staff may not even understand the nature of the system's wage indexation, so your question may sound as if it's coming from outer space. Moreover, they may quote your benefit net of Medicare's Part B premium payment since this is the check you actually get in the mail each month. What's riled me up about this issue? A conversation I just had with a financial planner, who was only operating on his client's printed earning history, using a Social Security optimization tool that just requests the full retirement benefit, or the primary insurance amount (PIA). For example, the source for a husband's benefit could well be quite different from that for the wife. If so, the software this planner is working with, even if it's correct under the hood (which is far from an easy task), could be advising his clients to wait years too late to collect particular benefits or start benefits years too early. Or it can tell clients to take the benefits in the wrong order. Strategies to maximize your Social Security benefits can be extremely sensitive to what's entered into these programs, so choose carefully as you would when purchasing any other service or product.

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