Workers Overestimate Their Social Security Benefits
Category: Financial and taxes in retirement
March 23, 2022 – A worrying study by the University of Michigan’s Retirement and Disability Research Center found that many workers tend to overestimate how much they will receive in Social Security retirement benefits. That is concerning because that overconfidence has a negative impact on how much people save getting ready for retirement. About half of the survey takers noted that they wished they had done a better job of planning. Note that about half of Social Security recipients rely on it for at least half of their income. The average Social Security retirement benefit in 2022 is $1658 monthly. The maximum is $4194 (for someone who takes it at age 70).
Among the findings in the study:
Many current workers recognize that they do not have a good idea of what their future retirement benefits will be. Forty-nine percent of the survey respondents declared having no knowledge about their benefit amount.
The average expectation bias for monthly retirement benefits in the sample was $307, which equals 27% of the average forecasted benefit for this sample (in current dollars).
People who said they had no idea how much they would receive in SS benefits actually underestimated their benefits less than those who were very confident about the subject.
Women tend to overestimate their benefits more than men.
One of the contributors to expectation biases is not adjusting for early or delayed claiming. The authors found that this would be most relevant for those with lower levels of education.
Conclusion
The model indicates that when individuals make consumption and savings choices based on their expectations about future retirement benefits, this results in too much consumption during the working years. That leads to too little asset accumulation, and, therefore, too little available for consumption in retirement.
Comments: Did you receive as much in Social Security as you thought you would? How big a difference was it? Please let us know in the Comments section below.
For further reading:
What Is Your Social Security IQ? (a quiz)
Comments on "Workers Overestimate Their Social Security Benefits"
Mick says:
I presume that when I get my estimate from the Social Security site, it shouldn't display that bias. I don't know why everyone doesn't go there and get the real skinny....
Editor's comment: Good point Mick! When you get that statement in the mail, check it out. And pay attention to how much you get if you wait. If you don't have a statement, go to https://www.ssa.gov/myaccount/ and create an account to find out how much.
Gary says:
I find the biggest guess or question is whether to factor in Cost of Living increases to what the SSA estimates your payment will be. Historically SS has gone up almost every year once your payments begin, although for the last few years the COL/inflation "raise" has been pretty small. I personally have factored a 1% increase per year in my retirement spreadsheet. Of course, I've factored in a 2% per year inflation increase, so the payments will be falling behind. I guess my point being is it's important to understand what your payment will be when you first start collecting SS, but then also important to know how COL and inflation will help and hurt your SS income.
RichPB says:
I concur with Gary. Our retirement planning spreadsheet also uses 1% cola for SS, though I set inflation at 3% and keep it as a variable that is dynamically adjustable. Certain costs are also set to assume 5% inflation. Across the board conservative estimates (such as 4% investment returns in recent years -- also dynamically adjustable) have kept us annually ahead of our plan. These provisions allow us to cope with current inflation concerns. (For the past 3 years I have also projected 0% current year investment gains separate from the long term returns.). We both took SocSec at 62 and never have depended on it for as much as 50% of income. Our budget is modest but comfortable for us allowing us to project greater annual costs for certain discretionary costs like vacations (though COVID put a clamp on that).
JCarol says:
As I've commented here before, research is the key to planning Social Security benefits. Benefit information is easily accessible on the SS website - the government couldn't make that part any easier. This is one of those cases where ignorance truly is no excuse.
When planning retirement we considered the official SS info sent to us, consulted books and web info by bona fide SS experts, evaluated our savings and investments, forecast our likely retirement expenses, and came up with the game plan that suited us best.
The Social Security aspect is playing out exactly as expected.
Cheryl says:
Each year long before retirement, we both went over our annual Social Security statements. We are receiving exactly what was expected. Our problem arose after attending several financial planning seminars available, here in Oklahoma, we were consistently told there was NO tax on Social Security. In this last year as we began taking Social Security and estimating our taxes, we quickly learned while there is NO state tax, there is Federal tax. That was a big surprise for us that so many had been wrong. I wished it was strongly noted in the annual Social Security statement.
Susan says:
Healthwise, I take after my dad who lived to 92, rather than my mother who died at age 69. I did a spreadsheet to calculate my "breakeven" point if I took Social Security at my "full retirement age" which was 66 or waited until I was 70. I'm single and self-employed since 1985 and I knew Social Security would be at least half of my income once I retired. My spreadsheet showed my breakeven point is age 85. If I live past 85, I win. If I die before then, the government wins. I waited until 70 and am so glad I did! You can't beat that 8% increase each year. I'm 75 now and still pretty healthy so was able to work full-time up until age 70 and beyond. Each person's situation is different, so it's important to look at your benefits at each age, and roll the dice.
Louise says:
Here is an article on what the COLA for 2023 'might' be. Too early in the year to pinpoint exactly.
https://finance.yahoo.com/news/high-social-security-cola-could-120007774.html
Louise says:
Article on 10 reasons to collect Social Security early:
https://www.gobankingrates.com/retirement/social-security/why-should-collect-social-security-early/?utm_campaign=1159481&utm_source=yahoo.com&utm_content=5&utm_medium=rss
Editor comment: Thanks Louise: As the article says, there is no definitive answer to the question. All 10 of these could make early the right decision, although we still say, if you can afford to wait, it is the smarter decision. I thought the reason about still working was not completely accurate, because any money withheld in the years before Full Retirement Age will come back to you at some point.