Third of near-retirees fail basic Social Security quiz

The level of knowledge is improving but the public still needs guidance on decisions about claiming benefits.

Just over one-third (35%) of near-retirees failed a basic quiz of their knowledge about Social Security benefits and another 18% earned a D, meaning more than half of Americans ages 55 to 65 do not understand the program’s basic rules, according to a new Mass Mutual consumer poll released Tuesday.

Even more startling, more than a quarter (26%) of individuals age 60 to 65 do not know that the full retirement age is gradually rising from 66 to 67. The first phase of the increase began this year as people who were born in 1955 hit the new full retirement age of 66 and 2 months in 2021. The full retirement age will continue to increase in two-month increments until it reaches 67 in 2027.

The online poll of 12 true/false statements was conducted March 1-9 among 1,500 Americans ages 55 to 65 who have not yet filed for Social Security benefits. It is the fourth such consumer poll that Mass Mutual has conducted since 2015.

But there is also good news.

A large majority (83%) understands the consequences of claiming Social Security benefits before reaching their full retirement age. A whopping 94% know that if they take benefits before full retirement age, their benefits will be reduced, and 86% know that if they receive benefits before their full retirement age and continue to work, their benefits may be reduced based on how much they make.

“We’re making progress,” said David Freitag, a financial planning consultant with Mass Mutual and long-time Social Security expert. He noted that the first time MassMutual conducted a similar consumer poll in 2015, nearly twice as many participants — 62% — failed, with the failure rate dropping to 47% in in 2018, 33% in 2020 and 35% this year.

A joint survey by AARP and the Financial Planning Association that was conducted in 2015 found an enormous gap in general knowledge about Social Security benefits, with only 9% of consumers saying they were very knowledgeable about how benefits are determined and just 1% of certified financial planners saying their clients were very knowledgeable about Social Security claiming rules.

“I think we’re making progress communicating the basics, but there are areas where we are still failing,” Freitag said, pointing to general confusion over benefits for survivors, divorced spouses and dependent children.

“I am getting more questions about survivor benefits than ever before,” he said, noting that the vast majority of the more than 550,000 Covid victims in the U.S. have been among those over age 65.

In the most recent MassMutual poll, 75% of near retirees incorrectly answered that if their spouse died, they would continue to receive both their own Social Security benefit and that of their deceased spouse. In reality, while a surviving spouse may step up to a larger survivor benefit, their own smaller retirement benefit would disappear.

Many consumers do not realize that Social Security survivor benefits and retirement benefits represent two different pots of money and that they may be able to claim one type of benefit first and switch to the other, larger benefit later.

For example, someone whose own retirement benefit is smaller than a survivor benefit could collect their own reduced retirement benefit as early as age 62 and still switch to full survivor benefits at their full retirement age. However, if the survivor continued to work and claim benefits before full retirement age, those benefits could be reduced if their earnings exceeded annual limits. Or someone with a larger retirement benefit could choose to collect full survivor benefits at their full retirement age and delay collecting their own retirement benefit until age 70, when it would be worth the maximum amount.

Retirement benefits increase by 8% per year for every year one postpones collecting them beyond full retirement age up to age 70. Survivor benefits do not. They are worth the maximum amount if claimed at the surviving spouse’s full retirement age. But 54% of those who participated in the MassMutual poll incorrectly answered that delayed retirement credits continue each year, even beyond age 70.

“With Social Security, there are a lot of options to consider,” Freitag said. “Make the wrong choice and you will be leaving money on the table for the rest of your life.”

When it comes to educating clients about Social Security benefits and claiming strategies, the pandemic has presented financial professionals with opportunities to connect with them in new ways.

“Social Security modeling is no longer a back-office exercise. Now people get on a Zoom call and look at modeling in real time,” Freitag said. “We can go through the details, offer choices, look at options — all from the comfort of their home.”

[Questions about Social Security rules? Find the answers in Mary Beth Franklin’s ebook at InvestmentNews.com/MBFebook.]