Unexpectedly Intriguing!
March 4, 2005

My review of the Heritage Foundation's Social Security Calculator is presented below. This is the last of the series, assuming no other new calculators are developed or that the reviewed calculators will be substantially revised.

The User Interface

The Heritage Foundation has put together a Social Security calculator that at first glance appears to be as simple as those commissioned by Senators Reid and Schumer and the CATO Institute. Once you've entered your basic data (current age and gender) and hit the submit button however, the interface changes to allow the user to customize the calculations to better fit their personal circumstances.

Just by entering your Zip Code, the other default settings for Current Earnings and Life Expectancy change, based on demographic data maintained in the Heritage Foundation's database. You can even change your current earnings, life expectancy and your retirement age based on your personal knowledge of yourself to assist with your future retirement planning.

The customizable portion of the interface also allows the individual user to set up their Personal Retirement Account portfolio by the percentage they could fund various types of investments and to determine what portion of the value of their Personal Retirement Account (PRA) will be converted to provide monthly benefits throughout their retirement, with the remainder being untouched for the purpose of inheritance.

With every change, the interface regenerates itself with data provided through Heritage's web and database servers. For users with slow Internet connections, this iterative process may be somewhat clunky. Users with high-speed Internet connections should not be affected as badly, but may encounter slow response times.

Sample Results

Leaving all the default settings unchanged, except for setting Current Earnings to $40,000, I produced the following table of data using the indicated gender and the ages that would correspond to the same birth years I used to evaluate the Reid/Schumer calculator (beginning with a current age of 30 to correspond with a birth year of 1975). Here are my selected results:

Selected Heritage Foundation Calculator Results
Current Age 30 (Birth Year 1975)
Result Male Female
Retirement Age 67 67
Monthly Benefit from Social Security $2,414 $2,091
Value of Entire PRA at Retirement $933,531 $801,969
Monthly Benefit from Converting Entire PRA into an Annuity $7,604 $6,533
Current Age 20 (Birth Year 1985)
Result Male Female
Retirement Age 67 67
Monthly Benefit from Social Security $3,361 $3,343
Value of Entire PRA at Retirement $2,154,028 $2,157,789
Monthly Benefit from Converting Entire PRA into an Annuity $17,546 $17,577
All monetary values presented in constant 2004 dollars.

The calculator did not provide provide results for those born 10 years ago or for those born in this year, which limits its utility in comparing results to those produced by other calculators.

Analyzing the Results

The Heritage Foundation assumes that only the amount of Social Security taxes currently set aside to provide retirement and survivor's benefits (10.6% of annual earnings) will be affected by proposed reforms, which agrees with what we know so far. The Heritage Foundation's calculator is unique in that it assumes that this entire percentage will be invested into a PRA. At present, no proposal adopted by either members of Congress or the White House follows this approach. From a results standpoint, the numbers produced through fully investing 10.6% of one's annual income in a PRA will be substantially higher than those produced by other calculators.

Underlying Assumptions

As noted in the customizable interface's Results Summary, the calculator does not reflect President Bush's reform plan. Also, the Heritage Foundation has prepared a list of Frequently Asked Questions [direct link added March 10, 2005] to address several of the tool's underlying assumptions (you may only also link to it through the calculator.)

The calculator assumes the user will begin investing in a PRA at age 21. This assumption means that if an individual begins working and investing in a PRA at an earlier age, the calculated results will be understated.

The Heritage Foundation assumes that the investments that make up its proposed PRA portfolio would have the following inflation-adjusted annual rates of return: Large Corporate Stocks (7.0%), Small Corporate Stocks (8.3%), High-grade Corporate Bonds (3.3%), U.S. Treasury Bonds (3.0%). The calculator does not provide the user with the means to modify these rates of return. Investment returns from these portfolio components may be substantially different from those calculated. Also, these investment options may not reflect the types of investments that will actually be available if the PRA option is adopted.

An amount equal to 0.7% of your portfolio is deducted annually over the term of your career. This amount is higher than those assumed in either the Reid/Schumer version (0.3%) or the CATO Institute's version (0.25%).

Other Issues

The method by which Social Security Monthly Benefits are determined is not described. The method by which the monthly benefit for the annuitized portion of the PRA is determined is not described. Also, no link or description of how a transition from the traditional Social Security retirement benefit program to the reformed system proposed by the Heritage Foundation is provided.

From a user interface standpoint, the Value of the Entire PRA Account at Retirement provided by the calculator is not prominently displayed. In any investment statement, this total investment value would be given greater emphasis.

Conclusions

The Heritage Foundation's Social Security Calculator represents the Gold Standard of what is available to individuals seeking to find out how Social Security reform may affect them. The calculator is definately aimed at the "high-end" user who wants to play with detailed numbers, particularly where their PRA portfolio makeup and estate planning options are concerned. For individuals who are simply looking to see which option may be better for them, these features may be overkill, since decades may pass before they would need to make any decisions regarding how to divide up their PRA to provide an inheritance for their heirs.

The biggest weakness in the Heritage Foundation's calculator is that it assumes a full 10.6% of an individual's lifetime income will be available to invest in a Personal Retirement Account. Presently, neither the White House nor Congress have adopted this approach. Overall, it's a great execution, and the degree of customization that is available to the individual user is amazing, but more customization would make this tool even better, particularly if it allowed the user to vary the percentage they could contribute to a PRA and to also modify the rates of return on the various investment portfolio options.

Update (March 10, 2005): The Heritage Foundation provides additional details behind their calculator's methodology, and also suggests a means for users to adjust the amount of income going into a PRA. (HT: Andrew Grossman.)

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