Poor Social Security Knowledge Has Big Costs

Social Security is the primary source of retirement income for most Americans. Even among affluent people who have built solid retirement plans, Social Security is an important source of stable income that is often used to cover fixed living expenses. Given its importance and central role, you'd think people would take the time to understand the program. And, of course, you'd be wrong.

[See Tips on Social Security Claiming Strategies.]

It is a cardinal rule of column writing that it's bad form to criticize your audience. So, let me be clear that I know Best Life readers are informed about Social Security, have taken the time to factor it into a sensible retirement plan, and have crafted a smart strategy for when to begin claiming Social Security benefits. Congratulations! But perhaps you will take pity on your uninformed friends and colleagues and see if they might benefit from some of your insights. Based on lots of research findings, they need the help.

Academics Hugo Benitez-Silva, Berna Demiralp and Zhen Liu surveyed more than 1,000 people of all ages and posed some fairly basic questions about Social Security. They weren't surprised at the small numbers of correct answers they received. In fact, they used that finding to help build a model of how much better off people would feel if they were well informed about Social Security rules and their benefits. The answers they obtained were that younger people didn't feel that much better, probably because their Social Security benefits were still decades in the future. However, as people aged, the value of understanding the program rose, and by the time people turned 60 years of age, 95 percent of them "got it" about the value of understanding Social Security. In fact, they would have been willing to pay a fair amount of money to make sure they had access to the best possible information.

Here are four of the basic questions people were asked. I know that you know the correct answers but humor me: 1) What's the minimum age at which people can begin collecting Social Security? 2) What's the earliest age at which people are entitled to full benefits that cannot be reduced by any outside earnings? 3) If you delay claiming Social Security, what's the maximum age at which your benefits will no longer increase each year (excluding cost of living adjustments)? 4) How many years must you have worked, and received W-2 statements, to be eligible for Social Security payments when you retire? And the envelope, please:

1. 62 years of age; 48 percent got this right.
2. It depends on when you were born. The so-called full retirement age is between 65 and 67; about two-thirds of those surveyed answered this correctly.
3. 70 years of age; only 23 percent knew this.
4. The equivalent of 10 years, or 40 quarters of earnings spread over a longer period; only 22 percent of those surveyed answered this question correctly.

[See Billions in Social Security Not Being Claimed.]

Now, there are degrees of being informed. Complete information was the norm for a lot of early academic research. Studies were based on the assumption that people took action based on complete information, and that when they did act, they behaved rationally. Of course, the real world doesn't work that way, and the field of what's called behavioral economics has boomed in the past 10 years. If people don't know all the information, they tend to make flawed decisions but they have a partial factual basis for what they decide. "On the other hand, under unawareness, they completely ignore some of the possibilities," the economists said in their study, "and thus cannot exploit any relevant information."

In the case of Social Security, there is a lot of unawareness. The researchers did find that people would be more willing to acquire information about Social Security if they understood how valuable it was to their future quality of life. But how do you convince people to solve a problem when they don't recognize they even have that problem?

The Social Security Administration has been pumping out annual benefit statements, reminders and pamphlets for nearly 75 years. It's been aided for the past several years by an enormous Web site that, if anything, may put off consumers by being too extensive. But people, even those near retirement, clearly have not been sufficiently impressed to do their homework. They haven't been motivated by a compelling value proposition. Walmart, for example, has fared well by adopting a tag line for tough times—"Save Money. Live Better."

Mottos, anyone?

[See also Is It Time to 'Super-Size' Social Security?]