Social Security AWI vs. COLA (Using The Wrong Numbers Could Cost You)

I bet you didn’t know this:

 

That is from the Social Security Administration 2018 Facts & Figures report. What the SSA is saying is that the information they’ve been using from the Census Bureau Current Population Survey(CPS) to report retiree income has been suspect. As such, the SSA is going to stop using the CPS numbers. 

Anyone who actually took the time to read the questionnaire the CPS was using when asking about retiree income could see this. The CPS question on retirement income essentially asked ONE question on retirement distributions. Basically the question was, did you have retirement income from an employer sponsored plan such as a pension? 

Well, very few of us have pension income anymore.  Inherently we’d answer no. In fact, at retirement, very few of us even keep our employer sponsored plan (401k, 403B, TSP) with the employer, we roll it to an IRA, and as such we’d also answer no; Not only do we not have a pension we no longer have an employer sponsored retirement plan. 

However, according to the Investment Company Institute there are nearly $10 TRILLION dollars in IRA assets. Yet the CPS never asked, specifically, about retirement income from IRAs. So, what we don’t know in the CPS reporting is how much of that $10 TRILLION paid out as income to retirees. 

The Tax Foundation reports that in 2016 nearly $1 TRILLION of income was reported as coming from Pension, Annuity and IRA income.  How much of that was solely from IRAs? I don’t know. But suffice it to say it was a LOT OF MONEY. Not to consider the income that is being derived from this huge amount of assets is simply unacceptable.  

Now, don’t hammer the Census Bureau too much here.  They did ask the question of retirement income but they did it in such a confusing way few would answer it correctly. As such they overlooked billions of dollars of retirement income. 

How did no one catch this? I remember a few years back reading the CPS questionnaire and thinking how insanely confusing it was.  I wondered what I must have been overlooking because there was no way the researchers could be this inept, right?  

I actually did a bit of investigation to see if there were any other folks taking issue with the CPS data.  Unfortunately, I found nothing. So, I assumed it must be me who was missing something. I mean, they couldn’t get this so wrong could they? They were professionals after all and I was just some guy in my home office. So, I just dropped the issue. 

Well, fast forward a few years, and lo and behold, it turns out it wasn’t me, it WAS them! Their data WAS screwed up, as mentioned in the Social Security statement above. 

It appears the CPS has now fixed this and it looks great. Kudos to them for their new questionnaire

For income and poverty, the updated processing system includes edits to take full

advantage of the redesigned questionnaire. For example, several variables were added for defined-benefit pension income and defined-contribution withdrawals (such as from 401(k) plans) to replace the previous variables on retirement income. The imputation system was updated to make use of income ranges provided by some non-respondents as well as to increase the number of characteristics used in the imputation models. (emphasis mine)

In fact, if you are so inclined to look at the 375 page questionnaire, you will notice questions related to retirement income explicitly excluding pensions and annuities. YAY!  (Just open the document and do a CTRL F and type retirement in the find box. You’ll see over a hundred references to retirement in this document.)

That is all good, don’t get me wrong.  When things aren’t up to snuff fixing things that are broken is a humbling experience.  But it has to get done. 

My problem though is how many gallons of ink has been spilled over the last decades decrying the “retirement crisis” and Americans lack of income in retirement using these very numbers from the CPS?

And, yet, it’s all been false. A crisis has been created that doesn’t exist. Why? Because no one actually took the time to read from where the numbers came, they just took it on faith the numbers were correct!

Unfortunately, this kind of blind-faith happens all over the place.  I want to point your attention to this article, “This Statistic Changed My Entire Perspective of Climate Change”.

The author states At this point, 97% of climate scientists are in agreement that climate change is real, and that it’s our fault — that is, human activity is causing the shift in global temperature and weather, rather than Earth’s natural climatic ebb and flow. With such a definitive, well-researched conclusion, it comes as no surprise that the facts have started to trickle down to the American public.”

This may be the most mind-boggling idiotic thing you’ll read today.  Why? Because the 97% number is a fraud. Anyone who did even the basic research on this would know that.  Yet, the author of this piece even goes as far to state “(w)ith such a definitive, well-researched conclusion”.  UGH!

Obviously, this guy didn’t read ANY of the research, he just took it on blind-faith the authors of various articles he read did.  As such, he spreads falsehoods that have certainly led people down a path they didn’t need to go.

No different than the massive amounts of retirement crisis doom-peddlers. People read this tripe and sadly don’t take proactive action to see if what they are reading is actually applicable to them.  They just take it on faith and stay in their crappy, old jobs because they’ve been brainwashed to think they can never retire. 

Don’t do that!  In this day and age of headline propaganda you really need to doubt EVERYTHING.  Don’t just cite some guy, myself included, you think knows what he is talking about without actually looking deeper into the facts. 

Trust NOTHING! That is the only moral of the story I can provide here. 

Using The Wrong Indexing For Social Security Projections Could Cost You Thousands

After expenses, Social Security is the most important part of almost every American’s retirement planning. So, its critically important to get it right when doing your future projections.

 

Probably the biggest mistake I see people making is using Cost of Living Adjustments (COLA) instead of Average Wage Index (AWI).  Now, you may not be familiar with these terms, but if you’re running projections you must know the difference. 

So, let’s explain. Social Security uses

the national average wage indexing series to index the earnings of individuals for benefit computation purposes.”

Huh?

 “Such indexation ensures that a worker’s future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime.”

Sounds like the Cost of Living Adjustment doesn’t it? But it’s not. 

The AWI number is what is used to adjust your benefits annually while you are under the age of 60.  Once you become 60 years old your annual increases will be based on the COLA number.

Since 1975, when COLA’s were used instead of legislative action to determine CURRENT retirees Social Security adjustments, the AWI has averaged 4.3% a year increase; COLA 3.6%.  Thus AWI has increased by .70% more each year than the Social Security COLAs. 

Now, let me explain how this affects you.  If you are under the age of 60 today and are using the COLA number to project your future benefits you are most certainly under calculating your future Social Security benefit

For instance, if you made $25,000 in 1975, again when COLA’s began, and used the COLA numbers for your annual increases, your $25,000 salary would be the equivalent of $125,000 in 2019.  Yet using the AWI instead, your $25,000 salary would be equivalent to $162,000 today. That, my friends, is $37,000 more under the AWI than the COLA; a 30% increase!

Let me give you an example.  I was born in 1970. My earliest year of eligibility for Social Security benefits is 62, in 2032. Let’s say my statement in 2019 from the SSA shows my benefit will be $2,000 a month, IN TODAY’S NUMBERS.  Of course, $2,000 a month is not what I’ll actually get. That $2,000 amount will be increased to reflect inflation. And here’s where the rubber hits the road. 

What type of inflation? The Cost of Living Adjustment? NO!  Until I turn 60 my Social Security benefit will be adjusted by the Average Wage Index.  If I didn’t know this and used the COLA to anticipate my inflated benefit I’d be giving myself a .70% cut in my annual benefit increase.  Don’t do this!

Make sure when you’re running your own Social Security projections you know what the heck you are doing!  If not, you could force yourself to stay in that crappy, old job out of ignorance of your TRUE Social Security benefit. 

And this is what is so frustrating to me. Most people, it seems, heck most professional advisors, simply have no clue how Social Security works at all.  They look at your statement you get today and if your statement says you’ll get $2,000 a month at Full Retirement Age, they’ll use $2,000 in their retirement projections.  This is worse than wrong, this is negligent. 

And, on top of that, they’ll assume you’ll pay tax on 85% of your benefits as well.  So, they’ll have you making $24k a year in Social Security at your FULL RETIREMENT AGE and they’ll say $20,400 is taxable as income. 

WRONG ANSWER!

As stated before, that $2,000 a month that your benefit statement shows right now will increase at an inflated amount. What that inflated amount is matters. Again, use the Averaged Wage Index amounts until you are 60, then use the COLA amounts every year thereafter. 

I hope this makes sense.  

See the video I did below for more info. You simply can not overlook how to calculate FUTURE Social Security projections.  If you don’t get this right, you simply are not going to get a true estimate of your benefit and thus your shooting blindly in the dark.  I don’t think I need to tell you, shooting blindly in the dark is NO Way to plan for retirement. 

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