Are we UNDER estimating Social Security Benefits?

It seems a lot of us complain about paying into SS. We don’t have much choice and its frustrating to know that we probably can’t count on it. I have always assumed that I would probably pay more into the system than I would ever get out. But, I had never run the numbers and now seems like a great time.

I used the SSA calculator provided on-line to estimate my SS benefits for a couple of different scenarios.
1) I assumed a retirement date of Jan 2010. So as of that date, no more funds would be contributed to my SS total earnings.
2) I assumed a retirement date of now, Jan 2008.
3) I assumed a conventional retirement at age 62. This means I would continue to contribute to my SS total earnings for an additional 15 years.

The difference in the estimated monthly benefit amount, (which would begin at age 62) was 3.5% between retiring today or delaying until Jan 2010. So, working an extra 2 years adds another 3.5%.

In the final comparison, between scenarios 1 and 3, I found that by retiring early in Jan 2010 my SS benefit would be reduced by 14%. That’s not a bad trade off. I am very willing to retire 15 years early and take a 14% benefit cut.

For the next part of this analysis, I referred to the pamphlet that the SSA sends each year to every taxpayer that explains their SS benefit. It details the amounts already paid into the system and projects what your payout will be in the future. My earnings from age 16 to present were provided in the SSA pamphlet.

I added up all of my SS earnings and multiplied by 12.4%. That is the amount that my employer(s) and I have paid into the SS system on my behalf. This number was less than I expected. I then divided that amount by the projected yearly SS benefit, assuming early retirement at Jan 2010, to arrive at the number of years required to collect benefits equal to my pay in. (I estimated my salary for 2008 through 2010 and added it in to the calculation as well)

To my surprise, it appears that with the current system, I could actually get every penny back and more! All I have to do is live 9.5 years beyond my 62nd birthday to collect every penny I ever paid in to SS. It is very likely that I will live to the age of 71 and maybe even several years beyond that.

One last note, for all of these calculations, I used today’s dollars. SS benefits will actually be adjusted for inflation, so the payout will be increased based on the inflation rate. This is a significant adjustment that will improve these numbers even more. By converting to inflated (future) dollars, the time required for me to collect the amount that I paid in to the SS system is reduced to 5.6 years.