Accurate Social Security Benefit Calculations

Our free retirement calculator forecasts your Social Security benefit for all retirement ages, including spousal and survivor benefits.


Retirement Calculator with Social Security

For generations, American retirees have relied on their Social Security benefits as a major source of retirement income security. But will these benefits still be around when you retire? And if so, what is the correct way to factor them into your retirement planning?


Will there even be Social Security by the time you retire?

We have all heard that our Social Security system is expected to run into serious financial difficulties in the not-so-distant future due to our aging population. The 2022 OASDI Trustees Report projects that the system will no longer be able to pay full Social Security benefits by 2035. However, even in the highly unlikely event Congress won't act to solve the problem, the system will still be able to pay 75% of all Social Security benefits at least for the remainder of their 75-year projection period. That said, this is not the first time we are in this situation and Congress has always acted in time to avoid any benefit cuts, usually by raising the Social Security tax. The Social Security Administration (SSA) has identified and priced literally hundreds of alternative solutions that can keep the system solvent.

At one extreme, the problem can be solved by increasing the Social Security tax from 12.4% (6.2% paid by both employer and employee) to about 16.4 (8.2% paid by both employer and employee) starting from 2035, or less if action is taken earlier. Other options include increasing the full retirement age, changing the basis for determining the cost-of-living increases, raising the taxable wage base or applying an extra tax on very high incomes.

The ultimate solution will probably include some combination of these options. It is unlikely to include outright benefit cuts, although you may need to wait longer to get an unreduced benefit if the full retirement age is increased further.

The right way to project your Social Security benefit

If your Social Security benefits are not going anywhere, what is the right way to include them in your retirement planning? Getting accurate Social Security estimates is not difficult. Using the right numbers in your retirement planning is where things get tricky.

The SSA offers a set of highly accurate and free calculators. They take into account all the details that go into your actual benefit calculation. The main difference between them is how they handle your earnings history:

Quick Calculator estimates your past earnings based on your current salary, with an option to overwrite the historical pay used.

Online Calculator lets you enter your earnings history manually (from your Social Security statement).

My Social Security Retirement Calculator pulls out your actual earnings history automatically but requires online registration and a rigorous verification process.

All of these calculators deliver the most robust and reliable estimates of your benefit - provided you supply your correct earnings history. You can use these estimates and enter them into your retirement calculator. Better yet, if your retirement calculator can estimate your benefits and match the SSA calculators, you won't have to go back and forth between the SSA calculator and your retirement calculator for each retirement age scenario.

One calculation. Two answers?

The SSA calculators produce two sets of results - measured in current dollars and future dollars. Picking the right set for your retirement planning purposes is where things get a little confusing. And the choice makes no small difference - the future dollars estimate can easily be twice as large as the current dollars value!

The current-dollar estimate helps you understand the value of your future benefit

Your current dollars results illustrate how much your Social Security benefits are worth in today's dollars or how much you would receive if both your salary and the national wage index remain fixed forever. Therefore, unless you are within a couple years of retirement, this number is far below the actual dollar amount you can reasonably expect to receive.

Put simply, if your current dollar Social Security benefit estimate is $2,000 a month, it means that your actual benefit at the time you retire will be enough to afford what $2,000 a month can afford today.

However, while the current-value estimate seems like a great number to have for your own understanding, it is NOT the number to use for your retirement planning.

Accurate retirement planning using future dollars

Your retirement planning is only as accurate as the projections it makes for all the pieces of your financial reality. Each piece has its own reasonable growth rate:

- Your savings should be increased with a reasonable investment return
- Your personal expenses with the consumer price inflation
- Your salary with a reasonable earnings growth rate
- Your fixed-rate mortgage payments should be kept flat (and then reduced to zero when paid off)
- Your health care costs should be projected with health care price inflation and health care age inflation
- Your home value and property taxes with an appropriate real estate inflation rate for your area

Your Social Security benefit should also reflect a best estimate projection of each of its building blocks - exactly what the future dollars estimate from the SSA calculators does.

We cannot simply assume that the individual growth rates average out to a perfectly uniform and simple number. We all have a unique basket of these items, and that basket changes over time. A robust and reliable retirement planning tool should use future dollars projections for each major component, including your Social Security benefits, based on well-researched assumptions.

How to make sure your retirement calculator uses the right Social Security estimate?

Ideally, your retirement calculator can accurately estimate your Social Security benefits on its own. However, it is important to check if their calculation is based on future dollars. If it's based on current dollars, we would recommend overwriting it with a future dollars estimate from an SSA calculator.

If their Social Security estimates are indeed based on future dollars, check if they are using the same projection assumptions as the SSA. The SSA calculators use the intermediate assumptions from the most recent OASDI Trustees Report, which is based on considerable economic research and is used by Congress for budgetary purposes. We would consider these to be the most reliable projection assumptions based on currently available data. If your calculator doesn't say explicitly that it uses the SSA assumptions, you can simply compare their estimates with those from the SSA calculators.

If your calculator doesn't calculate your Social Security benefit for you and asks you to enter it yourself, be sure to enter a future dollars estimate from an SSA calculator.

What about cost-of-living adjustments to your Social Security benefit?

The future dollars estimate you receive from the SSA calculators (or hopefully from your own retirement calculator) tells you how much you will receive in Social Security benefits the day you retire. This number will further grow every year after you retire to keep up with cost-of-living increases. Your retirement calculator needs to apply these increases for you.

Ideally, it will use the intermediate assumptions from the latest OASDI Trustees Report, which are the most informed projection assumptions. As of the 2021 OASDI report, this assumption is 2.4% per year.

If your calculator increases your Social Security payments with your general inflation assumption (for example, 2%), this may be fine too. Your future Social Security benefit will likely be underestimated, but that will build some conservatism into your model.

Can you use the numbers from your Social Security statement?

Not really, unless you are just about to retire. Your Social Security statement uses a current dollars approach, which means that it assumes that neither your earnings nor the average wage index will increase past the statement date. Thus, unless you are within a couple years from retirement, your Social Security statement is likely to grossly understate your projected benefit at retirement.

However, there is one piece of valuable information you can get from your statement: your Social Security earnings history. These are the numbers you can plug into your retirement calculator to get an accurate projection of your Social Security benefit.

Nobody knows the future! So why fuss about assumptions?

Uncertainty doesn't mean you should not and cannot make reasonable forecasts about the future based on the best available data and models. The correct way to manage uncertainty is to make reasonable, well-researched assumptions and then update your calculations on a regular basis to reflect actual data. This approach allows you to make timely adjustments to your plan along the way.

This is the general process used by insurance companies and retirement systems to manage uncertainty. It will likely work well for you, too. In fact, while these organizations are often required to fund any short-term shocks immediately, you have the luxury of spreading their impact over the rest of your life!

Can you add up your and your spouse's Social Security benefits?

If your retirement calculator doesn't model your and your spouse's Social Security benefits separately, it is tempting to enter the sum of your benefits.

That should work, right?

Not exactly. Even though you can get a good future dollars estimate from the SSA calculators for you and your spouse separately, simply adding them together assumes you will commence your Social Security benefits at the same time. This is rarely the case. Even if you retire at the same time, you may choose to start receiving benefits at different times. For example, many people wait until age 70 to start cashing in on their benefits. In that case, even a one-year age difference means your calculations will be off by an entire year of Social Security income.

Adding your Social Security benefits together also assumes that you and your spouse die at the same time. In reality, one of you will likely die before the other, and the survivor will get a survivor benefit if larger than their own.

And while on the topic of spouses, do consider "spousal benefits" as well. This is the benefit your spouse can be paid if higher than their own earned benefit (and vice versa). While you can get a future dollars estimate of each other's spousal benefits from the SSA calculators, it will be far more convenient if your retirement calculator can calculate them and factor them automatically.

Conclusion

We know this article sets a very high bar for retirement calculators. As actuaries who work on long-term financial projections for insurance companies and retirement systems (such as Social Security), we would not even be allowed to publish a projection that did not follow all of these principles, and possibly many more.