Tens of millions of Americans receive Social Security payments, and an even larger number of current workers expect Social Security to be there for them when the time comes for them to retire. Yet Americans have struggled for years to grasp even the most basic elements of how Social Security works, and many still don't know the essential rules that will help them predict just how much they can expect to receive from Social Security after they retire.
A study from AARP four years ago surveyed Americans about whether they knew the rules governing some of Social Security's most basic features. The results showed that Americans lacked knowledge in many areas of Social Security, including some of the most fundamental rules regarding when to claim benefits. Last year, retirement-management company Financial Engines announced the results of a newer study that found that nearly half of respondents failed an eight-question quiz composed mostly of true-or-false questions, while just 5% got perfect scores.
To help make sure you know what you need to know about Social Security, let's take a look at three of the issues that both studies found Americans don't know as much about as they should.
1. Monthly benefits go up by 33% if you wait to claim until the full retirement age of 66, rather than claiming early at age 62
Most people understand that Social Security rewards those who can afford to wait before claiming benefits. The AARP study found that only one in every 20 Americans was unaware that you could increase your monthly payments by waiting from age 62 until the current full retirement age 66 before claiming.
What people don't know, though, is the amount by which those benefits go up. Just one in 100 Americans chose the correct answer: 33%. Even if you broaden the acceptable range, only one out of every seven participants got within 10 percentage points of the right answer.
The confusing thing about the monthly-benefit rule is that it isn't actually a simple calculation. The increase from 62 to 63, for instance, is smaller than the increases for waiting one-year periods beyond 63. As you can see from the chart below, which is based on an assumed full-retirement-age benefit of $1,000 per month, the rise from $750 at age 62 to $800 at age 63 is a 6.7% increase, while the increase from $800 at age 63 to $867 at age 64 is larger, at 8.3%.
2. For Social Security payments based on your own work history, you'll get the maximum monthly amount if you claim at age 70
Only three in 10 participants in the AARP study knew that age 70 is the magic age at which you hit your maximum potential monthly Social Security benefit. More people believed that claiming earlier would still get you the biggest monthly payment, but a few believed that waiting until after age 70 would be the best move.
Delayed-retirement credits boost your Social Security payments if you wait until after your full retirement age to start collecting Social Security. The amount of the increase is 8% per year, maxing out at a 32% increase at age 70 for those who are currently retiring. Beyond age 70, though, you no longer get any additional benefit from waiting, so it makes sense to file for Social Security by age 70 even if you could afford to wait even longer.
3. Widows and widowers get no increase from waiting beyond full retirement age to claim survivor benefits
Those who've read all the recent advice about when to claim Social Security have seen age 70 thrown around so much that many think it's always the right answer. But when it comes to survivor benefits for widows and widowers, the typical rule of 70 goes out the window, tripping up the majority of Americans. Almost half believe that you can maximize your survivor benefits by claiming earlier than full retirement age, while nearly a quarter answered that you should wait until age 67 or later. Only 30% gave the correct answer of 66, the current full retirement age.
The reason the rule is tricky is that, when you claim your own benefits, you get delayed-retirement credits that add to your monthly payment. But with survivor benefits, delayed-retirement credits don't apply. Therefore your payment maxes out at your full retirement age, so it doesn't make any sense to wait beyond age 66 to claim, because you won't get any extra money in your monthly payment by doing so.
Social Security is notoriously complicated. But by understanding at least some of the basics of the program, you'll be in a better position to make smart decisions about when the right time is for you to claim your Social Security.