Thursday, November 6, 2008

New paper: Estimated Retirement Benefits in the Social Security Statement

The Social Security Administration Office of Retirement and Disability Policy has released a new Research and Statistics note "Estimated Retirement Benefits in the Social Security Statement," by Glenn R. Springstead, David A. Weaver, and Jason J. Fichtner. The paper examines the accuracy of the social security statement in projecting individuals' future retirement benefits. Here's the summary:

Since 1999, the Social Security Administration (SSA) has mailed an annual Social Security Statement to individuals aged 25 or older showing their reported earnings history. The Statement also provides workers with estimates of benefit amounts available under the Social Security programs. This note focuses on estimates of retirement benefits in the annual Social Security Statement.

Estimated benefits are adjusted for economy-wide average wage growth from about the time of Statement issuance to about the time of retirement. In addition, the Social Security Statement uses certain assumptions about current and future individual earnings to estimate retirement benefits. This note evaluates whether the Statement's assumptions produce accurate estimates, using data from a sample of recently eligible retired workers in SSA's Modeling Income in the Near Term (MINT) microsimulation model.

Here are some of the paper's findings:

  • Examining statistics based on differences measured at the individual level, we find the median differences are highest at the earlier Statement ages. For example, the median percentage difference between Statement PIAs and deflated retirement PIAs is minus 16 percent at Statement age 25, but narrows considerably at later ages (around minus 1 percent to minus 2 percent at Statement ages 40 or older). Note that these are median differences, not differences in medians.
  • A majority of sample members (57 percent) would have received Statements at age 55 with benefit estimates based on PIAs very close (plus/minus 5 percent) to their deflated retirement PIAs. Over three-quarters (78 percent) had values that were within 10 percent. Considering a 10 percent difference to be "fairly close," we note that by Statement age 40 a majority of persons have Statement PIAs fairly close to their deflated retirement PIAs.

I did some work in this area several months ago and I believe the new SSA findings match fairly well with my own analysis. Both find that the projections are reasonably accurate on average, and the accuracy of the projects improves as individuals approaches retirement.

(The principal issue I had with the Social Security Statement was not in how future benefits were estimated, but the way in which the estimated future benefit was converted to today's dollars. The Social Security statement "wage indexes" the nominal retirement benefit back to today. That is, if the nominal future benefit is b, the rate of nominal wage growth g, and the number of years until retirement n, then the wage-indexed benefit is equal to b/(1+g)n. The more conventional way to convert future dollar amounts to current dollars is through inflation-indexing, in which the value for wage growth g is replaced by a value for price inflation, p. If g is greater than p, as it generally is, then the Statement's wage indexed benefit under understate the better inflation-indexed estimate by and amount equal to the compounded differences between g and p. If real annual wage growth (g-p) equals 1.1 percent, then the Statement will underestimate the "true" benefit amount by roughly 1.1 percent for each year between now and the time of retirement.)

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