Basic Social Security Question

[Call_Me_Op]

[Topic is now in Personal Finance (Not Investing) - Social Security question. mod mkc]

At ssa.gov, one can obtain a projection of one's monthly Social Security benefit, depending upon the year that one retires. Do these projections assume an inflation rate?

[Outer Marker]

Since SS is COLA-adjusted, I would think the benefits projections are stated in today's dollars and will be adjusted upwards based on actual inflation as it occurs. I have not seen that spelled out, however.

[Call_Me_Op]

Since SS is COLA-adjusted, I would think the benefits projections are stated in today's dollars and will be adjusted upwards based on actual inflation as it occurs. I have not seen that spelled out, however.

Hence, my question - which strikes me as fundamentally important.

[Silk McCue]

Projections are always in todays dollars and are adjusted at the end of each year based on either the AWI Average Wage Index if you are under 60 or SS inflation adjustments announced each October.

Some more detail between age 60-62 from a prior thread.

posting.php?mode=quote&p=6272510

Social Security COLA is 5.9%. Does that mean I can add 5.9% to estimated future benefits? I'm still a few years away from claiming.

I believe if you are under age 60, the increase is tied to the wage index, not inflation index, though the two often move in tandem.

Yes, that’s the way it works. Your past wages will be indexed (one time) per the AWI at age 60. Then you will accumulate the Social Security COLA beginning at age 62 - even if you don’t file.

Cheers

[Call_Me_Op]

Thank you Silk. I thought that was the case - but the "iAsk AI" bot misinformed me.

[02nz]

Not the question you asked, but keep in mind also that those projections assume you continue to earn your current income. If your income goes up (up to the cap for Social Security taxes) or down, that will impact your SS benefits.

[Call_Me_Op]

Not the question you asked, but keep in mind also that those projections assume you continue to earn your current income. If your income goes up (up to the cap for Social Security taxes) or down, that will impact your SS benefits.

Thanks - not much effect in my case. I am early 60's and if I work until 70 (paying the maximum into SS) versus stop working immediately, it makes only about a $30 difference.

My biggest uncertainty is the possibility of benefits being cut in 2033 time-frame.

[02nz]

Not the question you asked, but keep in mind also that those projections assume you continue to earn your current income. If your income goes up (up to the cap for Social Security taxes) or down, that will impact your SS benefits.

Thanks - not much effect in my case. I am early 60's and if I work until 70 (paying the maximum into SS) versus stop working immediately, it makes only about a $30 difference.

My biggest uncertainty is the possibility of benefits being cut in 2033 time-frame.

Not a permitted topic on this forum.

[Call_Me_Op]

Not the question you asked, but keep in mind also that those projections assume you continue to earn your current income. If your income goes up (up to the cap for Social Security taxes) or down, that will impact your SS benefits.

Thanks - not much effect in my case. I am early 60's and if I work until 70 (paying the maximum into SS) versus stop working immediately, it makes only about a $30 difference.

My biggest uncertainty is the possibility of benefits being cut in 2033 time-frame.

Not a permitted topic on this forum.

Perhaps - but not asking for it to be discussed - just making a closed-ended statement of fact.

[Raspberry-503]

Not the question you asked, but keep in mind also that those projections assume you continue to earn your current income. If your income goes up (up to the cap for Social Security taxes) or down, that will impact your SS benefits.

It also assumes you are working until your retirement date, not retiring early and somehow bridging the gap (and not contributing more). Because it doesn't consider wage inflation, ssa.gov is likely to underestimate the PIA especially if you are many years from retirement.

I like Neuroshpere's spreadsheet (updated yearly) viewtopic.php?t=262772 to get a better and more granular idea of what my PIA will be.

An yes, it's always expressed in today's dollar

[MoreTaxes]

Not the question you asked, but keep in mind also that those projections assume you continue to earn your current income. If your income goes up (up to the cap for Social Security taxes) or down, that will impact your SS benefits.

It also assumes you are working until your retirement date, not retiring early and somehow bridging the gap (and not contributing more). Because it doesn't consider wage inflation, ssa.gov is likely to underestimate the PIA especially if you are many years from retirement.

I like Neuroshpere's spreadsheet (updated yearly) viewtopic.php?t=262772 to get a better and more granular idea of what my PIA will be.

An yes, it's always expressed in today's dollar

The SSA estimate does consider wage inflation, to an extent. Namely, they assume your salary will grow to keep up with inflation. In other words, they assume your future salary will remain constant, in today's dollars. That's why all of the future-year inflation index factors are 1.0 -- because those estimated salaries are expressed in today's dollars.

Some people who get a 5% raise every year want to enter a 5% higher salaries for future years in their SS spreadsheet to calculate benefits. I've seen so-called SS experts on youtube say that you need to do that, otherwise the PIA will be artificially low. That's wrong. Like everything else in the SS computation, the future-year salaries should be expressed in today's dollars. You should only enter your salary increase you expect that is over and above inflation. So enter 2% increases, if your raise is 5% and you expect 3% inflation. Assuming 0 real salary increase -- i.e., keeping up with inflation -- is not a bad estimate for a lot of people.

I looked at Neurosphere's spreadsheet. It says that SSA assumes NAWI growth will be zero. That's not true. SSA assumes NAWI growth will match price inflation.That's why the inflation index is set to 1.0 for the future years, for expressing future-year salaries in today's dollars.

Neurosphere's spreadsheet is very nice but it is missing some features. Such as, the PIA for other than integer ages. (Some people like to retire in January, for tax reasons.) Also, if you retire at age 68 or 69, in the first year you receive benefits, due to a quirk in the law, you don't get the delay credits for the current year. That is, if you are retiring at 68, don't expect your monthly benefit amount to be 108% of the PIA in the first year -- it will be lower. The SSA estimate will tell you only the first year, but a good spreadsheet will give you both numbers. Most of your life will be with the 2nd-and-after MBA, after all. Neurosphere's spreadsheet doesn't say which of the two values it is reporting.

[neurosphere]

I looked at Neurosphere's spreadsheet. It says that SSA assumes NAWI growth will be zero. That's not true. SSA assumes NAWI growth will match price inflation.That's why the inflation index is set to 1.0 for the future years, for expressing future-year salaries in today's dollars.

Hi MoreTaxes! When I write that the "SSA assumes", I'm writing specifically about the "mailed" statements with benefits estimate. They assume that both NAWI and CPI growth are very specifically zero. You can read about this here: https://www.ssa.gov/policy/docs/rsnotes/rsn2008-05.html. It's what they call the "statement PIA".

You write that the "SSA assumes NAWI growth will match price inflation". That cannot be true, because if NAWI growth and price inflation are each 3 (for example) the calculated benefit is different than if they were each 2. See the graph at the bottom.

But also you wrote "they set the inflation index to 1.0" for future years. That's not what happens. They set the index to "1" based on the year they turn 60, and index all previous years to the age 60 NAWI. If one has not yet turned 60, future NAWI is unknown. So some SS-provided estimates simply assume that NAWI growth = CPI growth = zero. In which case the future wages are indexed based on the most recently known NAWI.

Neurosphere's spreadsheet is very nice but it is missing some features. Such as, the PIA for other than integer ages. (Some people like to retire in January, for tax reasons.) Also, if you retire at age 68 or 69, in the first year you receive benefits, due to a quirk in the law, you don't get the delay credits for the current year. That is, if you are retiring at 68, don't expect your monthly benefit amount to be 108% of the PIA in the first year -- it will be lower. The SSA estimate will tell you only the first year, but a good spreadsheet will give you both numbers. Most of your life will be with the 2nd-and-after MBA, after all. Neurosphere's spreadsheet doesn't say which of the two values it is reporting.

You are correct that I only allow for integer ages. That's because the primary point of my tool is the visualization feature (the graph at the right) so that people can quickly understand rates of change of benefits based on earnings, and claiming age. E.g. "with these sets of salary assumptions I can expect about $X per year in future SS benefits until I die). It's for retirement planning. Details like when delayed credits are paid should not affect a (for example) 50 year old's planning. For retirement estimate purposes it hopefully makes little difference whether one has to wait until the new year to receive some delayed credits. I'm not trying to estimate "the number on the check".

The detailed calculator aka anypia is available for anyone who wants those details.

Oh, and I remembered that I had previously used anypia (in this thread: viewtopic.php?p=6904776#p6904776) to illustrate how a future benefit may change with changes in both wage growth and price growth. The black straight lines represents the sets of data where wage growth equals price growth. As you can see the slope is not zero, meaning that the benefit is different in the case where growth each equals -5 (far left) compared to +5 (far right).

[dcabler]

Not the question you asked, but keep in mind also that those projections assume you continue to earn your current income. If your income goes up (up to the cap for Social Security taxes) or down, that will impact your SS benefits.

Thanks - not much effect in my case. I am early 60's and if I work until 70 (paying the maximum into SS) versus stop working immediately, it makes only about a $30 difference.

My biggest uncertainty is the possibility of benefits being cut in 2033 time-frame.

Not a permitted topic on this forum.

This has been discussed many times on the forum, mainly having to do with projections by the SS board of trustees themselves regarding the percentage that can be paid out by a certain year.

Example: viewtopic.php?t=383659

Beyond that, speculation about what may/may not be done about it has been considered off limits.

Example of a post from the above thread: viewtopic.php?p=6824635#p6824635

Cheers

[MoreTaxes]

Hi MoreTaxes!

Hi neurosphere, nice to meet you! It's nice to meet someone who has thought deeply about the SS benefit computation. I am hopeful that we can resolve the differences in our understanding.

When I write that the "SSA assumes", I'm writing specifically about the "mailed" statements with benefits estimate.

Yes, I understand. I've set up my own spreadsheet which matches the mailed statements exactly, to the dollar. In the process, I have learned not just how to compute my benefit, but a lot about why the way SSA computes it makes a lot of sense, to me at least.

In particular, you may have seen that SSA provides an online tool that matches the statements exactly, at https://www.ssa.gov/benefits/retirement ... pplet.html. One nice thing about this web page is that the computation is done within the page itself, in javascript. You can click on view source to see all the gory details of how SS makes its computation. The javascript is well-commented and even includes a debugging mode. So, one could save that page locally, turn on the debugging flag, and see all of the intermediate computation results in pop-up windows. It's quite nice.

This enabled me to easily duplicate the computation that SS makes, including the exact form of rounding they perform.

They assume that both NAWI and CPI growth are very specifically zero. You can read about this here: https://www.ssa.gov/policy/docs/rsnotes/rsn2008-05.html. It's what they call the "statement PIA".

Thanks, I will look. At first glance, I see that the document does not mention anything about NAWI or CPI. It also looks like it is from 2008. But I haven't read it in detail yet.

You write that the "SSA assumes NAWI growth will match price inflation". That cannot be true, because if NAWI growth and price inflation are each 3 (for example) the calculated benefit is different than if they were each 2. See the graph at the bottom.

Thank you, I will try to download your spreadsheet when I get a chance and think about how you are making your computation and why it might differ from my own.

As you know, the latest available NAWI is for 2021. The number for 2022 will be coming out in October. I have a column of NAWIs, and they end in 2021. Those are used to compute the infation index factors for years 2020 and earlier. I do not use any NAWI value for 2022 or later. I also do not use CPI at all.

Instead, what I do is set the 2023 and later year indexed earnings to the 2022 earnings. This is consistent with the computation SS is making. I thought this was the same as NAWI growth = price inflation, because a series of increasing wages in raw dollars would be a constant series in 2023 dollars when compensated for by inflation. But maybe that is not quite correct, and it specifically means both are zero. I will think about it more.

I suspect the difference between your spreadsheet and mine is a matter of interpretation rather than producing different numbers. I say that because my spreadsheet agrees in every particular regarding the monthly benefit amount, compared to the mailed statements (well, PDF) I've been getting for the last few years.

But also you wrote "they set the inflation index to 1.0" for future years. That's not what happens. They set the index to "1" based on the year they turn 60, and index all previous years to the age 60 NAWI. If one has not yet turned 60, future NAWI is unknown. So some SS-provided estimates simply assume that NAWI growth = CPI growth = zero. In which case the future wages are indexed based on the most recently known NAWI.

NAWI growth = 0 is the same as inflation index 1.0, isn't it? Let me explain.

This is what the SS statement computation does. For each year Y up to 2021, an inflation index is computed as the ratio of the NAWI from 2021 to the NAWI from year Y. For years 2022 and greater, NAWI is not known, and in those cases the inflation index is set to 1.0. That is equivalent to setting NAWI growth to zero for those years, which would result in inflation indices of 1.0 for the later years.

You are correct that I only allow for integer ages. That's because the primary point of my tool is the visualization feature (the graph at the right) so that people can quickly understand rates of change of benefits based on earnings, and claiming age. E.g. "with these sets of salary assumptions I can expect about $X per year in future SS benefits until I die). It's for retirement planning.

I think it is important for planning. It's a shame, for example, that the SS statement only gives the first year monthly benefit amount. Take the case of someone trying to decide whether to file for SS at FRA of 67 vs. 68. The SS statement estimate would show a MBA of only 104% of PIA for filing at 68, if the person were born in June. The person would look at the 100% number and the 104% number and maybe say that it's not worth waiting a whole year for 4%. In reality, they would be accidentally foregoing a lifetime of 108% of PIA, because they would get 104% of PIA in year 1 and then 108% of PIA in every year after that. That difference can be enough to decide when to file, and not knowing it can mess up a decision. In any case, it is always better to provide correct information. Especially since I've seen some people compute net present values of their anticipated total SS benefit, and that doesn't work with incorrect numbers.

For retirement estimate purposes it hopefully makes little difference whether one has to wait until the new year to receive some delayed credits. I'm not trying to estimate "the number on the check".

I want to know not just the number, but which Wednesday of which month the first check arrives. That's the whole reason for my spreadsheet, so I could play with scenarios and know the numbers are solid.

[gregable]

Another useful calculator is https://ssa.tools/

You can adjust your estimated earnings in future years to however you'd like. It also accounts for filing date to the month, including the delayed bump until January for delayed credits.

[TBillT]

Just starting taking max at Age70 (which for me PIA was about 96-97% of theoretical max).
I thought it should be 97% based on Age66 PIA, so now I am trying to figure why it's only 96%, but minor difference.
I had worked a lot of years, so was expecting 100% but guess my early years did not count quite as much.

It does get confusing with COLA to look back and try to remember what you were thinking.
Keep your calcs handy.

[neurosphere]

NAWI growth = 0 is the same as inflation index 1.0, isn't it? Let me explain.

Yes I agree. No NAWI growth is the same as setting the inflation index for SS calculations to the most recently known NAWI and then assuming it never changes.

You are correct that I only allow for integer ages. That's because the primary point of my tool is the visualization feature (the graph at the right) so that people can quickly understand rates of change of benefits based on earnings, and claiming age. E.g. "with these sets of salary assumptions I can expect about $X per year in future SS benefits until I die). It's for retirement planning.

I think it is important for planning....In any case, it is always better to provide correct information.

My main point is that if one does not yet know their "age 60" NAWI which roughly is available at age 62, then using a NAWI growth assumption of zero is not "correct" [ignoring how the SS statements handle delayed credits for now]. Calculating the future buying power of an SS benefit (prior to age 62) requires assumptions about earnings and inflation parameters. The SS statements assume zero for each. This is "just as correct" as assuming 3% for each and which results in a different SS benefit when expressed in terms of today's dollars.

In my case I'm going to trust that the SS trustees are likely to have a little more knowledge and experience that I do when it comes to forecasting inflation. So I may as well use their numbers when estimating benefits which for me may be 20 year away and for others who use my calculator may be 40 years away. And of course, all we can do is base our estimates on current law. SS benefit rules have changed at least twice in my short lifetime and there is no guarantee that the current iteration will be the one in place when we start to receive payments.

But back to the OP's question for a moment. If one is 62 and their final NAWI is known, one can exactly calculate their future benefit (in terms of today's dollars) for any given set of past or future earnings assumptions. If one is not yet ~62, then estimating their benefit requires an assumption for future NAWI(s). With respect to the SS statements, future NAWI growth is assumed to be zero. I believe the that various online calculators at ssa.gov make the same assumptions, but I'm only 75% sure of this.

[MoreTaxes]

My main point is that if one does not yet know their "age 60" NAWI which roughly is available at age 62, then using a NAWI growth assumption of zero is not "correct" [ignoring how the SS statements handle delayed credits for now]. Calculating the future buying power of an SS benefit (prior to age 62) requires assumptions about earnings and inflation parameters. The SS statements assume zero for each. This is "just as correct" as assuming 3% for each and which results in a different SS benefit when expressed in terms of today's dollars.

You're right. No argument from me on that.

It is to your credit if you deflate the monthly benefit amount estimate back to current year dollars when expressing results. I think where people often go wrong is forgetting to express things in terms of today's dollars. For example, the bogleheads wiki points to the personal finance toolbox at https://docs.google.com/spreadsheets/d/ ... sp=sharing. That tool includes a Social Security benefits estimate that includes an option for using wage increase estimates from the Trustee's report. That's fine, but the result is that the benefits estimate is expressed in dollars of the year the person turns 60, not current year dollars. And it's not explained which year dollars the results are in.

I've seen the same sort of misleading statements from a professional financial planner on youtube trying to explain how to compute the benefit amount. He encouraged people to enter increasing personal future salary numbers, but not to account for inflation or NAWI growth properly. People could easily misunderstand their benefit by 50% doing this sort of thing.

With respect to the SS statements, future NAWI growth is assumed to be zero. I believe the that various online calculators at ssa.gov make the same assumptions, but I'm only 75% sure of this.

Yes, this was my experience in testing my spreadsheet. For the same input data, the tool at https://www.ssa.gov/benefits/retirement ... pplet.html agrees with the SS statements.

[Harry Livermore]

Following this discussion... mostly as a "fly on the wall" as More Taxes and Neurosphere discuss the "sausage making" in detail. Sorry if it derails the OP's result, but I think that question has been answered.
I have used Neurosphere's calculator and it lines up accurately with the SS statement and SSA tool online.
More Taxes, any chance you'd post your spreadsheet? Maybe Neurosphere or others could examine its operation. Maybe dummies like me could test it.
Cheers