Social Security benefit calculations assume that an individual's salary will remain the same during his lifetime.
San Francisco, CA (PRWEB) June 29, 2015
For many Americans, the Social Security benefit is underestimated by about $35,000. The challenge is in the calculation, which relies on two inaccurate assumptions:
1- The basic level of benefits increases with inflation
2- Earnings remain the same … forever
Assumption #1 – The Basic Level of Benefits Increases With Inflation
When the Social Security Administration creates a benefit statement, they start with a calculation of what that benefit would be today. Next, using the inflation rate, they forecast what the benefit will be in the future. However, when it’s time to claim Social Security benefits, the actual amount will be based on the average wage at the time of retirement, not on inflation.
Where $35,000 goes missing is that average wages have been increasing faster than inflation. Every year, the Social Security Administration looks at all tax returns to determine the national average wage. Since 1951, the average wage has outpaced inflation by almost 1% per year. That may not sound like much, but over time it adds up. Because of inflation, prices are about 9 times higher today than in 1951. But, average wages are 16 times larger today than they were in 1951.
Assumption #2 – Earnings Remain The Same… Forever!
When it’s time to claim Social Security benefits, the actual amount will depend on an individual’s earnings over their lifetime. The Social Security Administration’s benefit forecast assumes that wages will remain the same until retirement. We know that’s not true. Most Americans expect their income to increase as they gain work experience or get promoted.
In fact, the Social Security Administration itself commissioned a study1 that found this same issue with its calculations.
This article was written by Rajat Kongovi, CEO of aboutLife, and can be seen in its entirety here:
For a more accurate Social Security estimate, go to our free Social Security calculator at http://www.aboutlife.com
1Estimated Benefits in the Social Security statement, 2008. http://www.ssa.gov/policy/docs/rsnotes/rsn2008-05.html
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