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 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.
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"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 ( http://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.
For more from Mark Miller, see ( http://link.reuters.com/qyk97s )
(Editing by Matthew Lewis; Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.)
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