The Social Security Administration needs to up its game when it comes to helping retirees decide when to claim their benefits.
The timing of a Social Security claim is the most important financial decision most workers will make about their retirement.
Benefits can be claimed as early as age 62, but waiting just a few years can boost annual benefits by a whopping 25%- or more. Yet data from the Social Security Administration (SSA) shows that nearly half of workers claim benefits right away.
Journalists, financial advisers and companies that help retirees optimize benefits have been preaching the benefits of delayed filing for years. Now, lawmakers in the U.S. Senate are pushing the SSA to improve the guidance it provides on claiming decisions.
They are armed with a report published this month by the U.S. Government Accountability Office (GAO) that found problems and inconsistencies in the advice that SSA claims specialists give to people applying for benefits, and on the agency’s website.
The overriding message of the report is that the SSA needs to be more proactive about informing claimants that Social Security benefits can be a hedge against longevity risk. That is, the benefits provide a guaranteed income stream that helps protect people against the risk of outliving their money. That framing should often lead to a decision to delay filing.
Highly Personal Decision
To determine your benefit amount, the SSA takes into account your 35 years of highest wages, and translates this into something called the Primary Insurance Amount (PIA). If you wait until the full retirement age of 66, you would receive 100 percent of PIA. If you start at 62, you will receive a reduced benefit for the rest of life - 25 percent lower. By waiting until after full retirement age, you would get the delayed retirement credit, which is 8 percent for each 12-month period that you delay.
It is a highly personal decision that can be affected by your health and life expectancy and other sources of income. But many retirees simply think about the future break-even date - the point at which they will have made back the benefits they did not receive while delaying a claim.
Instead, most claimants should seek to maximize annual income with an aim toward the later years of retirement, when savings may be exhausted and Social Security is the sole source of income.
Married couples, especially, can benefit through a coordinated delayed filing strategy, since odds are high that one spouse will live well past actuarial average life expectancy.
The GAO report recommends that claims specialists lean toward recommendations of delayed claims. And it urges the SSA to clamp down on claims specialists who provide break-even analysis to enrollees. The practice already is forbidden under SSA policy, but GAO researchers observed claim specialists helping 30 enrollees, and found that some specialists are still providing break-even analysis. One specialist observed by GAO even told a claimant that it pays to file early.
The report also urged that SSA improve the way it explains how benefit amounts are determined - and how claimants might be able to get more by working longer. It also recommended changes in how claim specialists explain the so-called retirement earnings test, which temporarily withholds some benefits for enrollees who claim before full retirement age and continue to work. Many claimants misunderstand the retirement test as a penalty, when in fact the withheld benefits are added back to benefits after full retirement age is reached.
The GAO report was prepared at the request of the U.S. Senate Special Committee on Aging. At a hearing last week, Senator Claire McCaskill, a Missouri Democrat and the committee’s ranking member, took special aim at language on the Retirement Estimator calculator on the SSA website, which claimants can use to estimate the benefits they would receive.
A downloadable guide accompanying the calculator makes this statement: “If you live to the average life expectancy for someone your age, you’ll receive about the same amount in lifetime benefits. It doesn’t matter if you start receiving benefits at age 62, full retirement age, age 70, or any age in between.”
That is technically correct - if you live to the average life expectancy. This is a meaningful point for actuaries, but not for the average claimant. And the SSA guide, to its credit, actually does urge claimants to consider longevity risk in deciding when to file for benefits.
But McCaskill said she planned to turn up the heat. “I'm going to raise a ruckus about this until this website gets fixed. It is outrageous that it says this on this website, because it's simply not true. And hundreds and thousands of dollars that seniors deserve are going unclaimed."
Signs of Progress
The SSA also needs to focus on providing better information on spousal and survivor benefits, argues William Meyer, co-founder of Social Security Solutions, a fee-based service that helps workers optimize their benefits. “The SSA’s tools and statements leave out the spousal and survivor benefits that people might be able to receive,” said Meyer, who testified at last week’s hearing. “They should be able to show you that.”
Third-party services such as Meyer’s already can do that - but nothing would have more impact than an improved set of tools from the SSA, due to its public reach. And an agency spokeswoman told me this week that it is taking “immediate action” to implement all of the GAO’s recommendations, with some minor adjustments.
That is a sign of progress. As Meyer notes, so is the fact that prodding for change is coming from within government.
“What I like about this is that we’re finally seeing some awareness in the government that there’s an opportunity to help people get as much as they are entitled to receive from Social Security.”