Reviewing My Social Security Statement in a Time of Economic Insecurity
Yesterday Mr. ToughMoneyLove received his annual Social Security Statement, including earnings history and the estimate of retirement benefits. It actually made me feel more secure in this time of economic upheaval. Skeptical? Read on.
My Social Security Statement is Actually Helpful
First, I receive my personalized “Social Security Statement” on time every September without having to pester anyone for it. Second, the statement accurately reports my earnings history. Third, the statement is written in a way that is understandable. So kudos to the folks at the Social Security Administration for a job well done. It’s too bad that every surplus penny they receive from working Americans gets exchanged for IOU’s from the U.S. Treasury. Some “trust fund.”
Now More than Ever We Should Pay Close Attention to Our Social Security Statement
If you are under the age of 60, everyone in the investment community has been telling you not to count on Social Security. They say Social Security won’t be there for you. Don’t believe it. Yes there are uncertainties to be addressed. But what are the alternatives? Will society hang seniors out to dry for 10 to 30 years of their post-working lives? That is not going to happen. Is that what you want for your parents and grandparents? Even if you assume that all youthful workers will be cruel and heartless, seniors vote in large numbers. There will be a lot of us. Politicians of all ages understand that.
Just as profiteers in the real estate and banking sectors pushed unqualified buyers into home ownership, the investment community has been on a mission to persuade us that Social Security will disappear. That way, we will divert more of our cash into higher risk investments. (For an excellent analysis of the “Social Security will disappear” myth, read Retire on Less Than You Think by Fred Brock, a book that I recently finished and will be reviewing soon.) The investment community even had many politicians convinced that privatizing Social Security was the solution. As much appeal as that has for a free market capitalist like Mr. ToughMoneyLove, it won’t work.
Taking into account recent financial and economic news, everyone should be scrutinizing and understanding their Social Security Statement. Even if you don’t plan on “needing” Social Security yourself, you may want to factor your benefits into a comprehensive financial plan for maintaining a stable standard of living. Some economists call this “consumption smoothing.” I am a big believer in consumption smoothing so I pay close attention to what Social Security can do for me and for my wife (whom I am counting on surviving me. Please honey?) (For more about “consumption smoothing,” read Spend to the End by Scott Burns and Larry Kotlikoff, another book I will be reviewing.)
How to Get Your Social Security Statement
This year the Social Security Administration introduced an online retirement benefit calculator. Although useful, it does not contain your earnings history. Therefore, you should review the complete printed Statement.
If you are age 25 or older and have a work history, a Statement should be sent to you automatically every year. The month it is mailed depends on your date of birth. If you are under age 25, or if you want one sent at any other time, you can request that a Statement be sent to you. The request can be made online but the Statement will be mailed.
If you have never seen a printed Social Security Statement, here is a sample.
What I Learned from My Social Security Statement
My Statement of Earnings History
I now have 39 years of earnings. Retirement benefits are based on average earnings over a worker’s 35 highest earning years. (This is radically different from many pension plans which often base benefits on the highest three years or on the last five years of earnings.) The first six of my 39 earning years were part-time jobs in high school and college. I also worked only part-time in law school, maxing out at $7632 in one of those years. If I throw out my four lowest earning years and stopped working now, my benefit will still be based on 35 non-zero years, with the lowest being a whopping $1,507 earned in 1972.
This tells me that I could probably work very part-time until I decide to apply for benefits and not reduce my average earnings. However – and this is important – this does not mean that my benefit will not be lower than the estimate in the Statement. Why? Because the estimated benefits at retirement are based on an assumption that my taxable earnings will continue at a level that is close to my current average annual earnings. That is a larger number. In fact, the Statement tells you what this assumed number is. It gives you a target of sorts.
By the way, you are not entitled to any Social Security retirement benefit until you have banked at least 40 “credits.” You earn a credit for each $1050 of income, up to four credits per year. You have to be in the system for at least ten years, making at least $4200/year.
My Estimated Retirement Benefits
Based on current law and average earnings, if I elect to “retire” at age 62, my monthly benefit will be $1,699. If I wait until my full retirement age of 66, the monthly benefit jumps to $2,314. Finally, if I delay until age 70, I will be entitled to a monthly benefit of $3,102. This tells me that I can guarantee myself an annual raise of $17,200 (82.5% increase), plus inflation adjustments for life, by waiting eight years to claim benefits. My wife and I could do a few nice things for ourselves with that extra money. Of course, you younger folks will be providing that money. You want Mr. and Mrs. ToughMoneyLove to have a nice retirement don’t you?
Right now my plan is to wait until age 70 to apply for my retirement benefit. Why? Because I want to maximize the total benefits paid to me and to my wife over our combined lifetimes. This takes into account the survivor benefit that my wife (4 years my junior) is entitled to receive, which will be 100% of my benefit. Keep in mind that these benefits are adjusted for inflation. Even if I were to die at age 71, if my wife lives to be 85 or older, there is a significant cumulative difference between the $1,699/month she would receive if I started benefits at 62 and the $3,102/month she would get if I wait until age 70. The compounded inflation adjustments are also important.
Obviously, we will continue to study this issue. In particular, we will consider the cost of delaying Social Security benefits by looking at inflation rates and investment returns we could reasonably expect once the markets stabilize and turn steadily positive. I cannot be certain now that this will happen again in our lifetimes.
What You Should Do with Your Social Security Statement
When you receive your Social Security Statement, you should do the following:
Confirm the accuracy of the name and Social Security number data.
Confirm the accuracy of the data reported as your “Earnings Record.”
Read and understand the concept of your “Full Retirement Age.”
Read and understand the differences in benefits you will receive as a factor of the age you elect to receive benefits.
Read and understand the magnitude of the assumed future earnings on which your benefit estimate is calculated.
The Hard Truth Bottom Line
As skeptical and cynical as we might be about whether Social Security will there for us, it will give you a sense of security to accept that it will be. Frankly, we all could use an extra dose of security right now. The worst that is likely to happen in the future is that your benefits will be”means tested” such that your benefits will be reduced or delayed if you don’t need them. If “means testing” is implemented, that will be an unfortunate consequence of your hard work as a saver and investor. But it will also mean that you have provided for your own security. Not so bad.
Mr. ToughMoneyLove is curious – are any skeptics paying more attention to his or her Social Security Statement these days?