Your annual Social Security statement remains the most straightforward way to know what your Social Security benefits are anticipated to be in the future (at least on your current earning trajectory), and to spot discrepancies that could be corrected to increase future benefits.

Understanding what you should be able to expect to receive from Social Security once you retire is an important part of your overall retirement planning.  The Social Security Administration notes on your statement that Social Security benefits replaces, on average, about 40 percent of annual pre-retirement earnings.  Notably, this percentage will be lower for higher-income earners.  

In 1999, the Social Security Administration began mailing paper copies of Social Security statements to most American workers that summarized their personalized retirement and disability benefits.  However, various budget cuts over the years have precluded the Administration from continuing to mail paper statements to all workers.  The Social Security Administration does make online statements available and once you have established a ‘my Social Security’ account, you can easily access and download a current Social Security statement.

The information most individuals are concerned about are found on pages 2 and 3 of the statement.  These pages include a summary of your estimated benefits and recorded earnings to date. However, page 1 reminds us that Social Security benefits are meant to be only a supplementary source of income and not one’s only source of retirement income.

Page 2 of the Social Security statement includes a summary of your estimated retirement, disability, family survivors, and Medicare benefits.  These benefits are based on the average earnings over your entire work history that is summarized for you on page 3 of your statement.

Interpreting Projected Social Security Retirement Benefits

Generally, the benefit that individuals are most interested in understanding is their ‘retirement benefit’.  The first thing to understand about the estimated benefit shown on your Social Security statement is that it does not take inflation into account and is stated in ‘current’ dollars and not as future value dollars.  

In other words, there is no inflation adjustment being applied to your benefit amount although the Social Security Administration will almost certainly increase your benefits over time, via inflation adjustments.    

Example: Sue is a 55-year old worker who plans to begin collecting her Social Security Retirement Benefit at her Full Retirement Age of 67.  Her current Social Security statement estimates her benefit to be $2,500 per month at her Full Retirement Age.

If Sue (and/or her advisor) assume an estimated cost of living adjustment (COLA) of 2.0% per year over the next 12 years, Sue could expect to receive a check for $3,171 per month when she reaches age 67.   

It is also important to understand that the actual Social Security Retirement Benefit you will ultimately be entitled can be ‘off’ from the projected Retirement Benefit shown on your Social Security statement today because of more than just the lack of inflation assumptions.  This is because your projected Social Security Retirement Benefit is based on certain assumptions about future earnings. More specifically, the Social Security Administration generally assumes that whatever you earned last year will be what you continue to earn, in inflation-adjusted dollars, each year in the future until you reach retirement age.  (Note: Social Security assumes that retirement age is the age at which you begin to claim your Social Security benefits—not necessarily the age you actually retire.)

Example 1: Ben is a 50-year-old sales rep who typically earns about $65,000 a year.  However, in 2020, the most recent year for which earnings are on file with the Social Security Administration, Ben landed a once-in-a-lifetime mega-deal, earning more than the Social Security maximum wage base of $137,700 for 2020.  

Accordingly, and despite the fact that Ben fully anticipates future earnings of roughly $65,000 (not adjusted for inflation) per year, his 2021 Social Security statement will calculate his benefit using future earnings of $137,000 per year for the next 17 years (until Ben reaches his retirement age).  

On the other hand, in the event that you have no reported earnings from the prior year, but do have earnings from two years prior, the Social Security Administration will assume that the earnings for the last year simply have not been reported yet, and that the earnings from the prior-prior year will continue to be earned, in inflation-adjusted dollars, until you reach your retirement age.  

Example 2: Margaret is 60 years old and retired in December of 2019.  Prior to her retirement, Margaret earned $100,000 for 2019.  

Despite the fact that Margaret had no earnings for 2020 and that she is, in fact, retired, the Social Security Administration will continue to assume that Margaret’s prior-prior 2019 earnings of $100,000 will be earned through her retirement age of 67.  

Consequently, if you have no earnings from either last year or the year before last, the Social Security Administration will assume that you will have no earnings between now and your retirement age.  

Example 3: Up until 2018, Peter, age 42, was a high-earning worker.  In 2018, after the birth of his daughter, Peter decided to take a few years off work to spend time at home raising his daughter while his wife continued to work.  

If Peter reviews his 2021 Social Security statement, his projected future Retirement Benefit will assume that Peter has stopped working permanently and will have no additional years of earnings to lift up his benefits for the next 2+ decades.  Accordingly, his projected benefit on the Social Security statement will be substantially smaller than it will actually be if he returns to work as planned and continues to accrue more benefits.  

In each of the examples discussed above, your projected Social Security benefits, as shown on your Social Security statement, could be dramatically different from what you should expect to receive upon reaching your retirement age.  

Review Your Earnings Record  

The Social Security Administration calculates your projected and, ultimately, actual Retirement Benefit using your highest 35 years of wage-inflation-adjusted earnings.  Page 3 of your Social Security statement details the earnings that the Administration has on file for each year since you began working.  

In most instances, the information is accurate, but it is not that unusual for the earnings information to be missing or incorrect. Among other reasons, errors occur because an employer reported incorrect earnings, reported earnings using an incorrect Social Security number, or because the worker changed their name, due to marriage or divorce, and didn’t report the change to the Social Security Administration.  

If you are self-employed, it is particularly important to review your earnings history.  The reason is that self-employed workers’ earnings must be pulled from their tax returns, and up until about 15 years ago, the majority of taxpayers still filed their income tax returns using paper returns.  The transferring of a self-employed worker’s earnings information from their tax return to the Social Security Administration’s database was more likely to result in an error or omission of earnings, especially before around 2005.  

If you do find an error or omission in your earnings history, the mistake should be corrected as soon as possible.  Once you have gathered documentation to support the fact that earnings are missing and/or improperly reported, contact the Social Security Administration to have your record corrected.