How I Review My Annual Social Security Statement

I receive my annual Social Security Statement like clockwork each fall.  The contents of the statement, particularly the estimate of my retirement benefits, were of particular interest this time because of the dramatic economic and stock market events of 2008.

My Social Security Statement is Actually Informative and Helpful

I have to give credit to the Social Security Administration.  I receive my personalized statement on time every September without having to remind anyone.  The statement accurately reports my earnings history.  The statement is written in a way that I can understand.  So thanks and congrats to the Social Security Administration for a job well executed.  It’s unfortunate that every surplus dollar that the SSA receives from me and all other working baby boomers gets loaned to the Treasury so that it can be spent on other stuff.  Ah, the mysterious and nebulous Social Security ”trust fund.”

We Should Pay Careful Attention to Our Social Security Statement

Lots of people in the investment community and elsewhere have been telling us that Social Security won’t be there for you and me.  I don’t believe it.  In fact, there are very good reasons why I am counting on Social Security in my retirement plan.

If you consider the financial and economic events of 2008, baby boomers and in fact every working adult should be studying and learning from their Social Security Statement. Even if you don’t think you will ”need” Social Security for yourself, you may want to factor your benefits into your long term financial plan for maintaining a relatively stable standard of living.  This is sometimes called ”consumption smoothing” by economists who study this stuff.

How to Obtain a Social Security Statement

This year the SSA introduced an online retirement benefit calculator.  Although this calculator is useful, it does not contain your earnings history.  For baby boomers and others, making sure that the earnings history is accurate is very important.  For that reason, you should review your complete Social Security Statement that is mailed to you.

A Social Security Statement should be sent to you every year automatically.  The month it is mailed depends on your date of birth.  If you want a Statement sent at any other time, you can request that a Statement be sent to you.  You can make the request online but the Statement will be mailed to you.

What Mr. GoTo Learned from the Social Security Statement

Statement of Earnings History

I now have 39 years of Social Security earnings history.  Retirement benefits are based on a worker’s 35 highest earning years.   The first six years of my earnings were part-time jobs.  I also worked only part-time in college, maxing out at $7600 in one of those years.  If I exclude my four lowest earning years and stopped working now, my benefit will still be based on 35 non-zero years, with the lowest being $1,500 earned in 1972.

From this I conclude that I could probably work part-time until I apply for benefits and not reduce my average Social Security earnings.  However, this does not mean that my benefit will be the same as the estimate in the Statement.  This is because the estimated Social Security retirement benefit is based on an assumption that taxable earnings will continue at a level that is close to recent average annual earnings.  That number is larger.  The Social Security Statement tells you what this assumed number is, which gives you sort of a target.

You are not entitled to a Social Security retirement benefit until you have banked at least 40 earnings credits.  A worker earns up to four credits per year, one credit for each $1050 of income.  A worker also has to be in the Social Security system for at least ten years, earning at least $4200 annually.

Estimated Retirement Benefits

Based on existing law and average earnings, if I claim benefits at age 62, my monthly benefit will be approximately $1,699.  If I delay until my full retirement age of 66, the monthly benefit increases to $2,314.  Finally, if I delay claiming benefits until age 70, my monthly benefit will be $3,102.  In other words, I can give myself an annual raise of $17,200 (adjusted for inflation annually for life), by waiting eight years. Mrs. GoTo and I could probably find some nice things to do with that extra money.

So, my current plan is to wait until age 70 to apply for Social Security retirement benefits.  The primary reason for waiting is that I want to maximize the total benefits paid to me and to Mrs. GoTo over our lifetimes.  This takes into account the Social Security survivor benefit that my wife (4 years younger than me) will receive if I die first.  The survivor benefit will be 100% of my benefit.   If I were to die at age 71 after claiming only one year of benefits, but my wife lives to be 85 or older, there is a huge 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.  It is important to remember that Social Security benefits are adjusted for inflation so that the compounded inflation adjustments are also important.

We will continue to study this issue as age 62 approaches.  We will consider the costs of delaying Social Security benefits by examining inflation rates and investment returns we anticipate after the markets stabilize and turn positive.  Unfortunately, none of us can now be certain that this will actually happen again in our lifetimes.

What Every Baby Boomer Should Do with the Social Security Statement

When you receive your Social Security Statement, I suggest that you do the following:

Confirm the accuracy of your name and Social Security number.

Confirm the accuracy of the “Earnings Record” data as reported.

Study and understand your “Full Retirement Age.”

Appreciate the different benefits you will receive depending on the age you elect to receive benefits.

Understand the amount of assumed future earnings on which your benefit estimate is calculated.

Even if we are skeptical about whether Social Security will there for us, it will give all boomers comfort to accept that it will be.  My guess is that the worst that is likely to happen in the future is that our benefits will be “means tested” such that benefits will be reduced or delayed if we don’t need them.   I’m hoping that doesn’t happen to us or you because it is a form of punishment for being a good saver and investor over our lifetimes.

UPDATE January 2009:  You can now apply for Social Security retirement benefits online!

Photo credit:  ClintJcl

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