Social Security is a critical source of income for older Americans. Yet despite its central role in the finances of retirees and strong bipartisan popularity — a rarity for any institution these days — a new AARP study shows that Americans know remarkably little about how the agency’s retirement program works.
The study, timed to coincide with the 90th anniversary of Social Security, found that these retirement benefits are both popular and poorly understood, particularly when it comes to knowing how to maximize benefits. AARP found that 96% of survey respondents said Social Security is important, and 3 in 4 respondents characterized it as “very important” — a jump of about 10 percentage points since AARP surveyors began asking this question 20 years ago.
Although it’s unsurprising that nearly all respondents age 50 and up said the program was important, even support among 18- to 49-year-olds was well above 90%.
A potentially costly knowledge gap
About 2 in 3 retired respondents said they “rely substantially” on Social Security payments, up from about half who said the same in 2005. Given the essential role those benefits plays in older Americans’ finances, a surprisingly large percentage of people don’t really know how the program actually works.
Only 4 in 10 respondents knew that most people can begin collecting benefits at the age of 62. Even more sobering: Only 24% knew that by waiting until the age of 70 to begin collecting Social Security, you can maximize your monthly payments. People’s knowledge about spousal benefits is similarly hazy. For instance, only 44% of the survey respondents knew that you can collect Social Security in retirement based on an ex-spouse’s work record if you were married for at least 10 years before divorcing.
The biggest factor that affects the amount of your Social Security payment in retirement is how much you (or your spouse) earn over your career. The second-biggest variable is how old you are when you begin claiming benefits. Not knowing how to maximize your benefits can have a significant impact on what you can afford in retirement.
Why waiting to file for Social Security pays off
Most people can start claiming Social Security retirement benefits when they turn 62. But if you can avoid doing so, you should. That’s because for every month between when you claim and when you reach your “full retirement age” (that’s 67 if you were born in 1960 or later), the agency shaves a fraction of a percentage point off your full benefit amount. The difference of less than 1% might seem trivial, but those small amounts can add up in a big way: If you were to start taking Social Security at 62 instead of 67, that 60-month difference could mean losing a full 30% of the amount you would otherwise be able to claim.
When you reach full retirement age, you have another choice: Whether or not to wait even longer before claiming benefits. If you wait, you get to take advantage of something called delayed retirement credits. Every year after 67 that you wait to file increases your benefit by 8%, up to a total of 24% if you wait until 70 (the maximum age for earning those credits).
Of course, the trade-off with delaying until the age of 70 is forgoing that income in the interim, and the risk is that you might not live long enough to make the delay financially advantageous. But if you’re in good health, have a family history of longevity and can afford to delay taking payments, doing so could really pay off.
The Social Security Administration has a calculator and other tools that can help you make the decision. Broadly speaking, AARP estimates that it takes a little over 10 years to break even, so if you wait until the age of 70 to take benefits, you’d reach your breakeven point between the ages of 80 and 81.
Of course, plenty of people don’t have the option of waiting if they’re forced into an early retirement by health issues or job loss. But those whose finances do permit them to wait can get higher benefits for the rest of their life — and sometimes even beyond that. If you’re married and earned significantly more during your working years than your spouse, then waiting to take your benefits isn’t just better for you. This benefit can continue supporting your spouse if he or she outlives you, since the agency includes those credits you earned by delaying payments when they calculate benefits for surviving spouses.
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