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.
The problem is Social Security rules are complex, and the GAO study found many individuals do not understand key details that can affect their retirement benefits.
Charles Jeszeck, director of education, workforce, and income security at GAO, discussed the study’s findings during the Aging Committee hearing on Wednesday.
“Our review found that while many [Americans] have some basic knowledge about Social Security benefits, many older Americans do not understand important program rules and details,” he told the committee.
As part of the study, GAO investigators examined how Americans make decisions about when to claim their benefits through an analysis of surveys, academic studies and expert interviews, and in-person visits to Social Security Administration field offices.
“We also found that SSA provides broad claiming information on its website and publications,” Jeszeck told the committee. “However, despite the clear concern displayed by its staff, our analysis of 30 face-to-face claims interviews we observed in seven local SSA offices in three states found that people do not always receive the information they may need during a claims process.”
The GAO study found SSA’s claims process largely provides accurate information and avoids overt financial advice, however certain key information is not provided or explained clearly during the claims process.
To ensure that key information is provided by claims specialists, GAO suggests that they should inform retirees that delaying claiming will result in permanently higher monthly benefit amounts. GAO also recommends that claims specialists should avoid advising clients when to claim on a break-even analysis, which shows people how long they would have to live to make up for the fact that they are claiming benefits later.
The SSA generally agreed with the GAO’s recommendations, according to Virginia Reno, deputy commissioner for retirement and disability policy at SSA.
“We are pleased that GAO recognized the professionalism and helpfulness of our employees and the value of our online services, and we generally agree with GAO’s recommendations and are looking into how to incorporate them and reinforce the messages where they may not be as fully implemented as we believe they should be and as our spelled out in our policies,” she told the committee.
Because people often have made their decision to claim by the time they come to SSA’s offices to apply for benefits, Reno outlined the many ways SSA informs individuals about their claiming decisions before they decide to file for benefits—through their online tools, public education and the Social Security statement. According to SSA officials, 36% of people claiming retirement benefits in 2015 did so in person at an SSA office.
“Our Social Security statement, which we mail to workers beginning with their 25th birthday, is a very valuable tool to explain what you can get from Social Security,” Reno said. “It shows your earnings history, it estimates your disability and survivor protection and the retirement benefits you could expect to receive at 62, at full retirement age and at 70. We also provide user friendly information and publications via our website and some of the most highly rated online tools in the federal government are those at SSA.”
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