The problem with quick and easy Social Security calculators

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out

Boston University economist Larry Kotlikoff has spent every week, for over two years, answering questions about what is likely your largest financial asset—your Social Security benefits. His Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we feature “Ask Larry” every Monday. Find a complete list of his columns here. And keep sending us your Social Security questions.

Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. His new book, “Get What’s Yours—the Secrets to Maxing Out Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) was published in February by Simon & Schuster.

Watch Larry explain how Paul and his wife could collect an extra $50,000 in Social Security benefits:

Back in December 2013, I reviewed a free and easy Social Security calculator and pointed out that it asked far too few questions and did so in such an unclear manner that its use appeared, frankly, dangerous. The calculator seemed geared to get people to the institution’s website, where they might, by golly, purchase a product or two.

Since then, more than a dozen of these quick calculators have sprouted up — some for free, some for money.

For our book, Phil Moeller interviewed the CIO of an investment company offering a very spiffy, but also very simple Social Security calculator. He told Phil that speed was essential. Otherwise, people would hit a behavioral “blocking condition” and give up using the tool.

Gee willikers, a “blocking condition.” That sounds awful. I wonder if our doctors know about this. Once they do, I’m sure they will shorten our annual checkups to five minutes or less so we won’t walk out the door.

It’s wonderful that financial companies have diagnosed this disease and are helping us quickly decide when we ought to take Social Security. Yes, for many, if not most of us, Social Security is our biggest retirement asset. And yes, Social Security decisions are, to a large extent, irreversible. But, hey, how marvelous to be able to resolve our Social Security questions within a couple minutes before we’re “blocked” and diverted from buying financial products that — miracle of miracles — just happen to be up for sale on the very same sites as those super speedy calculators!

Last week, I came across a very aggressive ad for a fast and easy Social Security calculator. Visually, the tool was stunning. But the real stunner is how few inputs the tool requested and how misleading the tool could be when it came to actual family situations, which can vary tremendously. To be fair, the tool’s fine print disclosed some of its limitations. But its ad did not. And how many people read a company’s fine print?

Too many Social Security calculators claim to offer quick and easy solutions as to how people can maximize their Social Security benefits. Here’s what wrong with that—Social Security isn’t quick or easy. It’s complicated, and if you simplify it too much, you can lose a lot of money.


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To illustrate the problems with such quick and easy calculators, I ran the numbers for a hypothetical married household who I’ll call the Smiths. (Full disclosure: I ran these numbers through my own company’s Social Security software — this is not meant to promote anything, but rather to show the complexities of calculating Social Security benefits.) John Smith is 61 and has a maximum age of life of 95. Jane Smith is 45 and figures she might make it to 100. They have a disabled 10 year-old son, Jimmy, and a non-disabled two-year-old, daughter, Jill, who they just adopted. Jane was a property manager before she quit her job to be with the children, and John is a retired painter. According to Social Security, John’s full retirement benefit is $1,400 per month, and Jane’s is $2,800 per month.

The two got these figures, quoted in today’s dollars, either from their Social Security statement or at the local office. But as we discuss in the book, Social Security can’t even be trusted to give you proper retirement benefit estimates. Part of the problem lies in Social Security’s assumption that what you earned last year is what you’ll earn through your full retirement age. The other part involves Social Security’s assumption that there won’t be any inflation or economy-wide average wage growth in the future — even though we’ve had both for decades. These three assumptions can produce seriously skewed full-retirement benefit estimates.

It’s necessary to reverse engineer Social Security’s benefit estimates to provide the correct estimate. In John’s case, since he’s above 60 — when wage-indexation of covered earnings stops — and he had no earnings last year, his Social Security full retirement benefit estimate is actually correct. Jane, on the other hand, made $100,000 last year, which is more than she earned in prior years. For Jane, the correct full retirement benefit estimate is $2,556, not $2,800 per month. That is, Social Security’s benefit estimate is too high by almost 10 percent.

Most quick and easy Social Security calculators don’t ask the questions needed to fix up Social Security’s benefit estimates. Instead, such tools just takes the user’s entries and Social Security’s benefit estimate as given.

That’s strike one.

Strike two is the failure to account for the presence of young or disabled children, the user’s projected future covered earnings and other key inputs.

Strike three is the failure to properly discount (as in make less of) future benefits. Instead, many of these tools simply add up each year’s projected benefits and report the sum as your “cumulative benefit.” In effect, such quick and easy calculators treat a dollar received in, say, 30 years as worth a dollar today.

This is clearly off base. A dollar received today can be invested and thus, generate more than a dollar in 30 years. So a dollar paid to you in 30 years is not worth the same as a dollar paid to you today. In fact, today’s financial markets value the payment of a dollar in 30 years at only 70 cents, assuming that dollar, like Social Security benefits, is adjusted annually for inflation. And this 70 cents present value holds only if the future payment is for sure.

But what if you aren’t sure that you will be paid $1 of inflation-adjusted Social Security benefits in 30 years? The recipients of Social Security benefits have to be alive to collect their Social Security checks. If you aren’t alive in 30 years, then neither you nor your heirs will collect the money. As a result, we need to discount future Social Security benefits to an even greater degree in forming their present value.

In not doing any discounting, a great number of quick and easy Social Security calculators dramatically overstate users’ lifetime Social Security benefits. They also produce systematically biased recommendations.

So what’s the right strategy for the Smiths?

It’s pretty involved.

• John should take his retirement benefit at 62 and file for child benefits for the two children and a child-in-care spousal benefit for Jane. (Incidentally, these auxiliary benefits will be subject to the family benefit maximum, and on income tax grounds, it’s potentially better for just the kids to collect rather than have the family benefit max split three ways.)

• Having started his retirement benefit early, John should stop it at age 66, his full-retirement age, and restart it at age 70.

• Jane should file just for her spousal benefit at age 67, her full-retirement age.

• Jane should file for her own retirement benefit at age 70, at which point Jimmy will collect a child’s benefit on Jane’s work record.

• When John passes away, 10-year-old Jimmy will collect a child survivor benefit on John’s work record.

• When Jane passes away, Jimmy will collect a child survivor benefit on Jane’s work record. Assuming Jane lives to her maximum life expectancy, Jill will be too old to collect a child survivor benefit.

All told, the optimal plan involves the Smiths receiving 10 different benefits plus suspending one benefit—all at precisely the right time. This plan generates $1,378,469 in lifetime benefits. That’s $142,537 more that their original simple strategy of their both taking retirement benefits at 62.

What does one such quick and easy calculator — which ignores their children, does no discounting and fails to fix up Social Security’s full retirement benefit estimate for Jane — advise the Smiths to do?

It tells John that he should wait for eight more years to collect his retirement benefits, while Jane should take her spousal benefit at 67 and her own retirement benefit at 70. The optimized benefits are nearly $1,800,000!

Now that’s 30 percent larger than $1,378,469. Hence, following one such quick and easy Social Security calculator produces a huge overstatement of lifetime Social Security benefits as well as the wrong recommendations for the Smiths.

What happens if I run the numbers with all the correct inputs (the kids, 2 percent real discounting, and the right Social Security benefit for Jane), but with that quick and easy Social Security calculator’s “optimal” recommendations for filing for Social Security? Now the program generates about $1,300,000 in lifetime benefits. That is, following a quick and easy calculator’s advice cost the Smiths more than $50,000 in lifetime benefits. That’s a year’s college tuition, several trips around the world, a very fancy new car or maybe elective surgery for Jimmy.

Here’s the bottom line: The quick and easy Social Security calculators make losing money quick and easy.