Deciding what age to begin claiming Social Security retirement benefits may be the single most important financial decision many Americans will make, and a new Government Accountability Office (GAO) study revealed how ill-informed Americans are about the process.
The study, commissioned by Sen. Susan Collins, R-Maine, and Sen. Claire McCaskill, D-Missouri, also detailed how the Social Security Administration could improve its claims process to help people make better-informed decisions about retirement benefits.
“The American public is clueless that this decision is so important,” McCaskill said during a Senate Aging Committee hearing Wednesday afternoon. “It is staggering that so many Americans don’t realize that this is a decision at all. Many think you just claim at 62, or when you stop working. Or when you claim Medicare. Or when you hit full retirement age at 66 or 67.”
Few people realize their benefits can go up by 8% annually for each year they delay claiming benefits, up to the age of 70.
“Eight percent a year,” McCaskill, who is ranking member of the committee, stressed. “Eight percent a year. That is a very attractive return in today’s market. It’s really the best deal in town. You can’t invest in a risk-free, inflation-protected annuity, which is what Social Security is, in your 60s and expect to see any return like that.”
Collins, who is chairman of the committee, gave the example of an average person earning $42,000 per year. That person, filing at age 62, would receive approximately $1,200 per month from Social Security. If this person is able to keep working until age 70, however, his or her monthly benefit could reach $2,112—an additional $912 per month.
“That’s nearly $1,000 more each and every month,” Collins said. “And, $12,000 more every year than if the senior had started receiving benefits eight years earlier.”
Despite the large gains from delaying Social Security, Sita Slavov, a professor at George Mason University, who has been doing research on Social Security and retirement policy for 14 years, told the committee that most people claim Social Security at or before the normal retirement age.
“Very few people delay to age 70,” she told the committee. She added, “One possible explanation for this is people want to stop working and do not have the retirement savings to pay for living expenses while they delay benefits.”
While that explanation might be applicable to some people, Slavov’s research suggests something else.
“My research suggests that around a third of those who claim before normal retirement age have individual retirement account assets that would allow them to delay Social Security by at least two years,” she said.
Slavov stressed the importance of ensuring that the claiming decision is an informed one.