Social Security plays a central role in the financial lives of many older Americans. Despite its significance and widespread bipartisan support, a new AARP study reveals that a surprisingly large number of people still don’t fully understand how the program works — especially when it comes to maximizing benefits. This lack of knowledge can be a costly gap, particularly as Social Security continues to be a vital income source for retirees.
The Importance of Social Security
The AARP study was conducted to mark the 90th anniversary of Social Security. It found that while Social Security is widely viewed as important — with 96% of respondents agreeing — there is still a substantial knowledge gap among the public. A notable 3 in 4 respondents labeled Social Security as “very important,” reflecting a jump of about 10 percentage points over the past 20 years. It’s no surprise that nearly all respondents aged 50 and above recognized its importance, but even younger adults aged 18-49 showed strong support, with over 90% viewing Social Security as crucial.
However, despite its importance, the study revealed that many people don’t fully understand the program’s rules and options. This is especially concerning since many Americans rely heavily on Social Security to fund their retirement.
A Knowledge Gap That Can Be Costly
The study highlighted that nearly two-thirds of retired respondents said they “rely substantially” on Social Security benefits, up from half in 2005. Despite its crucial role, many respondents showed a lack of awareness about key aspects of the program. For example, only 40% knew that most people can start claiming benefits at age 62, and only 24% knew that waiting until age 70 could maximize their monthly payments.
Knowledge about spousal benefits was also lacking. Only 44% of respondents knew that they could collect Social Security benefits based on an ex-spouse’s work record if they were married for at least 10 years before divorcing. This lack of awareness can lead to missed opportunities for maximizing retirement income.
The largest factors that influence your Social Security payment are your lifetime earnings and the age at which you begin claiming benefits. Not understanding how to optimize your benefits can lead to lower monthly payments, impacting your quality of life in retirement.
Why Waiting to Claim Social Security Makes Sense
You can start claiming Social Security benefits at age 62, but it is generally better to wait if possible. If you claim benefits before your “full retirement age” (which is 67 for those born in 1960 or later), the Social Security Administration (SSA) reduces your benefits by a small percentage for every month before you reach that age. While the reduction might seem small — less than 1% per month — over time, it can add up. For example, claiming at 62 instead of waiting until 67 could reduce your benefits by 30% over the course of your lifetime.
After reaching full retirement age, you have another option: delaying your claim until age 70. This allows you to earn delayed retirement credits, which increase your benefit by 8% for each year you wait to file, up to a total of 24% if you wait until age 70.
The Trade-off of Delaying Benefits
The main challenge of delaying Social Security payments until age 70 is the need to forgo those payments in the interim. If you can afford to wait, however, delaying can be very beneficial, especially if you are in good health and have a family history of longevity. The longer you wait, the more you stand to gain, but you must weigh this against the risk that you may not live long enough to recoup the additional amount from delaying.
AARP estimates that it typically takes a little over 10 years to break even, so if you wait until age 70, you would reach your breakeven point somewhere between the ages of 80 and 81. If you are married and have earned more than your spouse during your working years, delaying your benefits not only increases your own payments but also provides a higher benefit to your surviving spouse after your passing, as they will inherit your delayed retirement credits.
Maximizing Social Security Benefits
If your finances allow you to delay claiming Social Security, doing so can provide higher monthly benefits for the rest of your life. This is particularly important if you are married and your spouse may outlive you, as the SSA includes delayed credits in the benefits calculation for surviving spouses.
For people who are unable to wait due to health issues or early retirement, claiming early may be necessary. However, for those who can afford to delay, the additional benefit can significantly improve your financial stability in retirement.
Social Security is an essential financial tool for millions of Americans, yet there is still a significant lack of understanding about how the program works and how to maximize its benefits. Acknowledging the importance of Social Security is not enough; understanding when to start claiming, how to maximize benefits, and the impact of delayed retirement credits can make a substantial difference in your retirement income. It’s crucial for everyone, especially those approaching retirement, to educate themselves about their options to make the most of this vital resource.
