Deciding when to claim Social Security benefits is one of the most important retirement moves you will make. Social Security is by far the largest retirement asset for all but the wealthiest Americans, and the only source of guaranteed lifetime income - with incredibly valuable annual inflation adjustments.
And most of us are flubbing it.
In 2012, 38 percent of men, and 43 percent of women, filed for benefits at age 62, according to the Social Security Administration. An additional 41 percent of men, and 37 percent of women, filed by their full retirement age. Just 3 percent took benefits at age 67 or later. (The remainder were Social Security disability recipients, who are converted automatically to retirement benefits at their full retirement age.)
The majority of early filers could have received thousands of dollars more in annual benefits after filing, because benefits are adjusted up or down from full retirement age by about 8 percent, up until age 70.
Waiting isn't right for everyone. If you're in ill health and don't expect to have a long retirement, or you're in dire straits because of a job loss, filing early can be a sensible step. But the numbers show that most people will do much better by waiting at least until their full retirement age.
That's especially true for married couples. The odds of one spouse enjoying better-than-average longevity are high, and Social Security benefits can be critical for surviving spouses at an advanced age, when other resources often are exhausted.
But even shorter term, the boost to retirement security can be huge. Consider this example, with numbers courtesy of T. Rowe Price's Social Security Benefit Estimator, for a single, 62-year-old woman earning $50,000. Retiring today, she would receive an estimated $14,000 in annual benefits. Waiting until 66 gets her 35 percent more annual income ($19,000), while waiting until 70 ratchets up benefits a full 79 percent, to $25,000.
If our retiree were fortunate enough to live to age 95, she would collect $82,000 more in lifetime benefits by waiting until age 66 to claim - and $157,000 more if she waits until age 70.
Why do so many of us get this wrong? Researchers at the business schools of the University of California at Los Angeles and Duke University decided to explore the psychology of Social Security claiming decisions. They conducted a series of surveys of Americans ages 35 to 65, examining their attitudes about risk, values and how they make judgments. They concluded that suboptimal Social Security claiming is most often tied to incorrect expectations about longevity and misunderstandings about risks and fairness issues in the Social Security system.
Here are their key takeaways:
- Aversion to perceived loss is strong. Despite the big gains available through delayed filing, people are uncomfortable waiting to take possession of Social Security benefits because they fear a loss of total accumulated lifetime benefits if they don't live long enough. "People see it as something that already belongs to them," says Suzanne Shu, co-author of the study and an assistant professor at UCLA's Anderson School of Management. "The longer you have to wait, it feels like a loss."
Shu and co-author John Payne of Duke University's Fuqua School of Business found that people who didn't like gambles are more likely to claim early. But most would be better off waiting to file, maximizing their current benefits, rather than worrying about the lifetime payouts.
"I could get hit by a bus and won't get the money," Shu says. "But that's a loss when you're dead, so it's defensive regret. Does anyone really lie on their deathbed thinking, 'Oh, I didn't take Social Security benefits early enough.'?"
More important, Shu and Payne found their survey respondents tend to underestimate the odds of living past certain ages, and that even people who expect to live longer don't push out their claiming dates as far as they should.
- Patience pays. Not surprisingly, patient people are more willing to delay filing. "We asked people to imagine that they had some money coming to them - and that they could have $1,000 today, or wait a year and get $2,000," Shu says. "People who were more willing to wait the year also were more likely to claim Social Security after age 65."
People who expect to live longer also are doing a better job saving for retirement, are more willing to invest in stocks to build their nest eggs and are more interested in annuities, which can be another important hedge against the risk of outliving your money.
- Perceptions of ownership and fairness color people's decisions. Americans feel - correctly - that they have worked for, and earned, Social Security benefits. "The view is, 'It's mine, and I want my money out,'" Shu says.
That view is part of the problem. Social Security is an earned benefit, resulting from years of work and payroll tax contributions. But it's not a personal account with a specific dollar amount earmarked for you. Rather, it's a promise of a specific benefit that will be paid over the course of your life in retirement, no matter how long you live. Any benefit system that makes an open-ended longevity promise of that kind - think pensions or annuities - depends on pooled mortality risk. Some participants will live longer, some shorter.
I asked Shu if she could recommend any particular form of Social Security psychotherapy to help Americans adjust their approach to claiming - and reap the financial rewards.
"I wish I knew the answer to that," she said. "But I do think it would be useful for people to think of Social Security as something that we're all in together. We need to get people to change their thinking about Social Security from something that's due to them as income, and start seeing it as an insurance policy protecting them from the risk of longevity."
"If I die tomorrow and don't get my money's worth, someone else who is a part of the system will be the beneficiary of what you gave up. It's not like the government gets to keep it and do something bad with it. It goes to other retirees who are also playing this gamble."