Here’s a question for you. How accurate is the “estimate” of your future Social Security retirement income that is shown on your annual SSA statement?
The estimate of your future Social Security retirement income on your annual SS statement takes into account your earnings history so far and extrapolates it out assuming moderate wage growth.
The most accurate estimate would be for a person who turns full retirement age in 2015. Their primary insurance amount (PIA) was actually calculated back in 2011 at age their 62. That amount has been raised by four years of COLAs: 3.6% in 2012, 1.7% in 2013, 1.5% in 2014, and 1.7% in 2015. If the person continued to work and improved their earnings record after age 62, these increases are already reflected in the PIA shown on this year’s statement. So if they apply for Social Security this year, at 66, the amount they receive should be very close to the amount shown on the annual SS statement.
For anyone else, the estimate could be off — perhaps even way off!
Depending on how far away you are from full retirement age. The benefit estimate on the statement takes into account your prior earnings as reported by your employers and recorded onto your earnings history. It presumes those earnings will continue each year until claiming age, increasing by about 3-4% a year (although the benefit estimate itself is shown in today’s dollars).
If your actual earnings are different—say you stop working several years before claiming—the monthly income estimate could be off by as much as $200. This is true even if you already have your 35 years of earnings history. The reason is that recent earnings count for more than long-ago earnings, even after those earlier earnings are indexed for inflation. For example: the maximum wage base today is $118,500. The maximum wage base in 1975 was $14,100; after indexing it counts for about $73,000.
Someone who keeps working at the maximum wage base will continually be improving his earnings record as newer higher earnings replace older lower earnings. The benefit estimate presumes this earnings improvement, so if the client stops working early, the actual benefit will be lower than the estimate.
On the other hand, someone with a low earnings history who continues to work at a higher-than average salary would see an improvement in the benefit because the estimate is based on lower earnings.
If you would like to see how your future earnings may affect their benefit estimate, you can visit the SSA Retirement Estimator at ssa.gov. This tool allows you to enter your prior earnings history along with different projections for the future to see how your future benefit would change.
And if you ever worked in a job that didn’t pay into Social Security NO FICA taxes withheld), the estimate shown on the statement does not take into account the Windfall Elimination Provision (WEP), which could reduce the estimate by as much as $400. You can adjust for the WEP using the SSA WEP Calculator on the same website.
I hope that explanation helps.
All the best… Mark