Americans Underestimate Social Security Income by $1,900: Study

What You Need to Know

New research shows that the mean Social Security income forecast error made by older Americans is $1,897, or nearly 12% lower than the actual benefit due.
There is considerable variance in the forecasting error, with about 25% of older Americans underestimating their benefit by $5,000 or more, and 10% overestimating by $5,000 or more.
The analysis suggests that the provision of additional information to pre-retirees can reduce such errors.

Older adults generally have accurate expectations about their Social Security claiming age, but they underestimate their annual Social Security income by approximately $1,900, or 11.5%, on average, according to a new paper published by the National Bureau of Economic Research.

The analysis, written by contributing NBER researchers Grant Seiter and Sita Slavov, utilizes panel data from the University of Michigan’s Health and Retirement Study survey series, which collects data from about 20,000 U.S. household members ages 50 and older every two years.

Specifically, Seiter and Slavov compare HRS respondents’ observed Social Security claiming ages and benefits with subjective expectations provided during their 50s and early 60s, finding that, while older adults generally have accurate expectations about their claiming age, they commonly underestimate their annual Social Security income. Both forecast accuracy and precision increase with age, however, such that the average forecast error for people in their early 60s is not statistically different from zero.

The researchers go on to use “plausibly exogenous variation” in the mailing of Social Security statements, which contain personalized information about future benefits, to show that the provision of additional information to late-career workers can help reduce forecast errors in annual income.

Ultimately, the researchers conclude that the provision of better information through Social Security statements would have a statistically significant effect on reducing forecast errors, thereby allowing Americans to plan for their retirements more accurately.

Running the Analysis

As Seiter and Slavov point out, the University of Michigan’s ongoing Health and Retirement Study provides detailed demographic, financial and expectations data on a nationally representative set of individuals over the age of 50 and their spouses or partners. Crucially, the researchers explain, the HRS collects information about respondents’ expected and actual Social Security claiming ages and benefit amounts.

In this case, Seiter and Slavov use data from the HRS “waves” 1-14, covering 1992 to 2018. The survey questions and responses analyzed include the following:

Do you expect to receive Social Security benefits at some time in the future?
At what age do you expect to start collecting these benefits?
If you start collecting Social Security benefits then, about how much do you expect the payments to be in today’s dollars?

According to Seiter and Slavov, the responses collected generally indicate whether the frequency of a given respondent’s expected income is per week, bi-weekly, monthly, annually or a lump sum. For the purposes of their analysis, the NBER researchers ignore “lump sum” and “other” frequencies and convert the remaining expectations to annual values. They also set expected income to zero for those who report not expecting to receive Social Security benefits.

The researchers then converted these monetary values to 2021 dollars using the Retroactive Consumer Price Index for All Urban Consumers, and to inflate expected income, they use the index value for the calendar year and month in which the respondent’s interview ended. Finally, for observed income, which is reported for the last calendar year, they use the index value for December of the previous year.

The results of this analysis, according to Seiter and Slavov, suggest that approximately 10% of respondents — all of whom eventually collect Social Security — do not expect any benefits. This fraction is smaller than estimates from surveys that include people of all ages, the researchers note.

Overall, the mean Social Security income forecast is $1,897 lower than the actual benefit that is due, which represents an 11.5% underestimate relative to the mean observed benefit. Notably, there is considerable variance, with 25% of older Americans underestimating their benefit by $5,167 or more, and 10% overestimating by $5,319 or more.