PBS has a nice story featuring Boston University economist Larry Kotlikoff on the benefit estimates that are provided to working-age individuals through the Social Security Statement.
The Social Security Administration’s benefit online calculators aren’t to be trusted for use for people under age 60, even for someone who is single and was never married and will never marry. The reason is that unless you change their assumptions, they assume (in contradiction to the Social Security Trustees’ Report’s own assumptions) that the economy will experience zero economy-wide average real wage growth and zero inflation between now and the end of time. That’s an odd assumption for an economy that’s experienced positive average real wage growth rates as well as inflation for each of almost all the postwar years.
There’s another way to understand the issue, which I’ve outlined in a Christian Science Monitor op-ed and a longer research piece for RAND. In this reading, which is mathematically equivalent to what Kotlikoff describes, the SSA estimates benefits using reasonable assumptions regarding wage growth and inflation and generates a decent estimate of the nominal benefits a person will be entitled to.
But the SSA then indexes that future benefit to the present using, not the Consumer Price Index, but the Average Wage Index. So while SSA sometimes claims that benefit estimates are in today’s dollars, or adjusted for the cost of living, they’re actually not.
The scale of the difference is meaningful. For instance, a typical worker retiring 30 years from today will receive a nominal Social Security benefit of about $64,750 per year. Adjusted for inflation, that future benefit will be $27,683 in today’s dollars. But that’s not the figure he’ll see on his Social Security Statement. Rather, because the SSA wage-indexes his future benefits, the figure he would see on his Statement will be just $17,982, which is 35 percent lower than the true purchasing power of his benefits is expected to be.