Social Security: Improvements to Claims Process Could Help People Make Better Informed Decisions about Retirement Benefits
Released: 2016-09-14T00:00:00

Letter

Background

According to SSA, 84 percent of households with someone 65 or older received Social Security benefits in 2014. To qualify for benefits, an individual must typically earn at least 40 credits, based on earnings on which they and their employer pay Social Security payroll taxes. According to SSA, as of 2015, 69 percent of the population age 20 and over had earned 40 credits. The amount of initial monthly retirement benefits depends on the beneficiary’s earnings history and the age at which he or she chooses to begin receiving benefits. SSA figures monthly retirement benefits by calculating the individuals’ average indexed monthly earnings (AIME) during his or her highest 35 years of earnings, with earnings from past years adjusted to reflect the growth in average wage levels over time. (If the individual has earnings in less than 35 years, non-earning years count as zeroes in the AIME calculation.) Retirement benefits are then determined by a formula that converts an individual’s AIME into a Primary Insurance Amount (PIA). The PIA is the monthly benefit a claimant receives if he or she chooses to begin benefits at the FRA (see fig. 1). Benefits are generally adjusted based on inflation each year. Up to 85 percent of retirement benefits are also potentially subject to income tax, depending on total income.

The FRA has risen from 65 originally to 66 for individuals born from 1943 to 1954, and it will be 67 for individuals born in 1960 or later. Beneficiaries may generally elect to begin receiving Social Security benefits as early as age 62; however, an age-62 claimer will receive less each month than if he or she waited to claim until reaching FRA. As the FRA has risen, so has the reduction in benefits for pre-FRA claiming, relative to PIA. An eligible individual with an FRA of 66 who claims at 62 would receive a monthly benefit equal to 75 percent of PIA (see fig. 2). Future retirees with an FRA of 67 who claim at 62 will receive 70 percent of PIA. Although SSA uses the term “full retirement age” to refer to the age at which workers receive unreduced benefits (sometimes called “full benefits”), those who wait to claim benefits beyond their FRA receive “delayed retirement credits” that boost monthly benefits to more than 100 percent of PIA. An eligible claimant born in 1943 or later can receive delayed retirement credits equal to 8 percent of PIA per year past FRA until age 70. For example, a claimant with an FRA of 66 who claims at age 70 receives 32 percent higher monthly benefits than PIA. Thus, a retiree with an age 66 FRA and a PIA of $1,000 per month would receive $750 per month if claiming at age 62, $1,000 per month if claiming at age 66, or $1,320 if claiming at age 70. Individuals who claim benefits at ages in between would receive a monthly benefit between $750 and $1,320.

According to SSA, someone who lives to an average life expectancy should receive about the same amount in lifetime benefits irrespective of when they claim benefits because the lower monthly benefit amount and earlier start date would offset each other. However, several factors affect the tradeoffs of claiming at different ages. For example, how long a person expects to live, based on family history or current health status, can affect when he or she claims. For married couples, the longevity of both spouses could affect the lifetime household benefits received because Social Security pays survivors benefits to widowed spouses. Increasing life expectancy and years spent in retirement raise the potential cost to retirees of receiving lower monthly benefit amounts from claiming earlier. According to the 2016 Social Security Trustees report, average life expectancy at age 65 has increased from 12.7 years in 1940 for men to 19.1 in 2015, and from 14.7 to 21.5 years for 65-year-old women. However, lower-income individuals have shorter-than-average life expectancy, which means that, on average, they can expect to receive Social Security benefits for substantially fewer years than higher-income individuals who have longer-than-average life expectancy. Moreover, disparities in life expectancy by income have grown, according to studies that examined trends over time. Interest rates also affect the tradeoffs of claiming early versus later. When market interest rates exceed price inflation by less than usual, delaying claiming may become more financially attractive for those with the ability to continue working or to live off of other financial resources. Several studies that have examined the Social Security benefit formula and claiming decision process show that many people would receive higher lifetime benefits by delaying claiming benefits.

A spouse, ex-spouse, or surviving spouse of an eligible worker can receive benefits based on the primary worker’s earnings, if this benefit exceeds the benefit he or she would receive based on their own earnings history. Spousal benefits generally amount to 50 percent of the primary worker’s PIA, if the spouse is at FRA when claiming them. For survivors, the age at which the primary worker claims benefits can potentially affect the monthly benefit of the surviving spouse. A spouse can generally claim as early as age 62, and survivors may begin receiving benefits as early as age 60 (50 for disabled survivors); to qualify for benefits at age 50, a surviving spouse must be disabled under the Disability Insurance program rules. As with regular benefits, both spousal and survivors benefits are reduced if the spouse or survivor begins receiving them prior to their FRA. Unlike with regular benefits, spouses and survivors do not receive delayed retirement credits if the spouses or survivors delay claiming beyond their FRA.

Individuals who claim benefits before their FRA but continue to work for pay face a retirement earnings test, with earnings above a certain limit resulting in a temporary reduction of monthly benefits. In 2016, SSA withholds $1.00 of benefits for every $2.00 of earnings above $15,720 for someone younger than FRA for the full year. In the year the claimant reaches FRA, the earnings limit rises to $41,880 (for 2016), and $1.00 of benefits is withheld for every $3.00 in earnings in the months prior to the claimant reaching FRA. Benefits withheld under the earnings test are not forfeited, but are really deferred, and are, on average, paid back later with interest. In addition, every year after the initial claim for benefits, any new earnings the worker has are reflected in a recomputation of the AIME and a potential increase in the PIA.

Many other rules can potentially complicate claiming decisions, creating challenges in understanding key information for claimants and their spouses. For example, there are rules covering eligibility for dependent children (or grandchildren) and for maximum family benefits, to name a few. Over time, changes have been made to eligibility ages, the retirement earnings test, the FRA, and other important factors affecting claiming. The Bipartisan Budget Act of 2015 recently eliminated two complex strategies utilized by some married couples. One allowed a person at or older than FRA to file for benefits, but then immediately suspend this claim so that no benefit would be paid. This “file-and- suspend” strategy allowed that person’s spouse to claim spousal benefits on the suspender’s record, while the primary worker’s benefit accrued delayed retirement credits in suspension. Another strategy allowed a person at FRA or older to file a claim only for spousal benefits based on the earnings record of a primary worker who had claimed benefits. This allowed the spouse to receive a benefit while allowing the spouse’s own benefit to grow, then later switch to their own benefit as late as age 70. The 2015 act eliminated the file-and-suspend strategy, effective April 30, 2016, by no longer allowing anyone to claim benefits on another person’s record while the primary claimant’s benefits are suspended. It also eliminated spousal-only claims for anyone born after January 1, 1954.

SSA pays retirement benefits from the Old Age and Survivors Insurance (OASI) Trust Fund. The fund receives revenue from, among other sources, Social Security payroll taxes paid by current workers, and pays current beneficiaries. Workers and employers currently each pay a payroll tax of 6.2 percent of an employee’s covered earnings, for a combined total tax rate of 12.4 percent, into the Social Security Trust Funds. This payroll tax applies only to workers’ earnings up to an annual limit ($118,500 for 2016); this limit changes each year with changes in average wages and has generally increased each year. According to the 2016 report of the Social Security Trustees, the OASI Trust Fund is projected to become depleted in 2035, at which point payroll taxes of current workers are estimated to be enough to pay only 77 percent of promised benefits.

Lack of Understanding of Key Social Security Information, Along with Financial Need and Other Factors, May Contribute to Individuals Claiming Benefits Early

Individuals Have Some Knowledge of Social Security Benefits, but Most Do Not Understand Key Program Rules and Details

Our review of survey reports and academic studies, and interviews with people with Social Security expertise, suggest that most individuals do not understand important rules and details that could affect their retirement benefits or the benefits of their spouses and survivors. Specifically, many people approaching retirement age are unclear on how claiming age affects the amount of monthly benefits, how earnings (both before and after claiming) affect benefits, the availability of spousal benefits, and other factors that may influence their claiming decision. Understanding this key information is central to making informed decisions about when to claim Social Security benefits because they concern the tradeoffs of claiming benefits (and perhaps retiring) earlier versus later—generally permanent decisions—and ultimately affect the amount of lifetime benefits and people’s retirement security. GAO recognizes that financial literacy is critical to empowering and helping individuals and families to stay financially healthy and stable and the role the federal government plays in promoting financial literacy. It also has highlighted financial security for older Americans as a key issue, including the importance of ensuring financial literacy in understanding the key factors that can affect their retirement income.

How Claiming Age Affects Monthly Benefits

Seven of the surveys we reviewed found that some of the respondents are aware that their benefits would increase if they wait until FRA to claim; however, many do not have a good sense of how much and thus may not understand the tradeoffs of claiming earlier versus later. Claiming at younger ages means an earlier start to benefits, but at the expense of the permanently higher monthly benefit amounts that come with claiming at an older age. For example, in a phone survey of 2,000 individuals ages 25-65, the Financial Literacy Center found that when asked to estimate their monthly benefit at their planned claiming age and what they might expect if they waited two years, 62 percent of respondents seemed to understand their monthly benefit would increase if they delayed claiming. However, 36 percent of respondents indicated they did not understand how their benefits would be adjusted depending on claiming age or incorrectly believed that their monthly benefit would be the same no matter when they claimed. Greenwald & Associates conducted for Financial Engines an on-line survey with over 1,000 near claimants and current beneficiaries between the ages of 55 and 70 and found that many respondents did not understand the extent to which benefits can increase between ages 62 and 70. For example, only 40 percent gave estimates that approximated the real monthly increase that would result from a 2- year delay. In an AARP study that surveyed over 2,000 individuals ages 52-70, when participants were asked what would be the earliest age at which they should claim benefits to maximize the monthly amount, only 29 percent responded with the correct age of 70.

How Lifetime Earnings Determine Benefit Amount

The three surveys that asked the respondents about the number of years in the benefit calculation found that most do not know that benefits are based on their highest 35 years of earnings. If the individual has earnings in fewer than 35 years, non-earning years count as zeroes in the AIME calculation. Thus, some individuals could permanently raise their monthly benefits not only by delaying when they take benefits, but also by replacing zero or lower earning years with higher earning years in the “high-35” calculation. Three of the surveys we reviewed asked respondents how benefits are determined. The median respondent in an academic study that surveyed over 2,300 Social Security eligible individuals between ages 50 and 70 believed only the 10 highest years of earnings were counted. A study conducted by Greenwald & Associates for the Financial Literacy Center reported that only 23 percent of the 2,000 age 25-65 phone-survey respondents could correctly identify that benefits are calculated based on 35 years of earnings, and 27 percent of the respondents believed, incorrectly, that benefits are based on the last 5 years of earnings and the number of years worked. Another 23 percent thought benefits were based on the Social Security payroll taxes they paid and the interest earned on those taxes. An AARP survey of over 2,000 individuals age 52 through 70 who were eligible for Social Security benefits based on their own work asked respondents to select from a range of options the number of years of highest earnings used to calculate benefits. Only 7 percent selected the correct number of years.

Knowledge of Spousal and Survivors Benefits

Results from five of the surveys and studies we reviewed that asked about spousal benefits indicate that many people may not know about spousal benefits based on a husband’s or wife’s earnings history. Only 48 percent of the more than 2,000 age 52-70 respondents to an AARP survey who were or ever had been married knew they could collect benefits based on their living spouse’s record. Similarly, an academic study found about 50 percent of the more than 2,300 survey respondents between ages 50 and 70 who were eligible for Social Security benefits incorrectly believed their spouse would not be eligible for benefits if the spouse had never been in the paid workforce. Given the lack of awareness about how claiming age affects benefits for the claiming worker, it is likely the case that claimants do not know how early claiming may reduce spousal benefits. Six of the studies we reviewed found their respondents had a general understanding of survivors benefits. However, two of the surveys show that some married respondents are not aware of the effect their claiming age potentially could have on their widowed spouses’ benefits, and one of the two studies also showed that just under half (48 percent) of married or ever married respondents were not aware of the additional effect the widowed spouse’s own claiming age has on that benefit. A collaborative study by AARP and the Financial Planning Association that surveyed more than 1,200 future Social Security beneficiaries ages 45-64 showed that, among ever-married respondents who knew they could receive survivors benefits, many did not know that the age the deceased spouse or the age the surviving spouse claimed could affect the monthly benefit amount of the surviving spouse.

Effect of Retirement Earnings Test on Benefits

Each of the four surveys that asked about the retirement earnings test found that individuals, if they know of the retirement earnings test at all, do not understand fully how working and receiving benefits before FRA can affect their benefit amounts over time. An AARP survey of over 2,000 individuals age 52 through 70 who were eligible for Social Security benefits based on their own work found that while 76 percent of survey respondents understood benefits could be reduced by earnings depending on the amount of earnings, 71 percent incorrectly believed that the reduction would be permanent. In a 10-question survey of more than 1,500 individuals between ages 25 and 65, conducted on behalf of Massachusetts Mutual Life Insurance Company, more than half of respondents incorrectly believed that they could continue working while collecting all of their benefits regardless of their age. A minority of the over 2,300 respondents (40 percent) between age 50 and 70 in an academic study who were aware of the earnings test threshold understood correctly that any reduction for earnings up to FRA is offset by an increase of benefits after FRA. Understanding the retirement earnings test could prevent individuals erroneously thinking the earnings limit will result in a permanent loss of benefits. It might also prevent a claimant from seeing the earnings test as an incentive to retire and claim benefits at age 62 or reduce earnings to stay below the earnings threshold. Studies have pointed out that many claimants have earnings that cluster around the retirement earnings limit, suggesting they believe benefits withheld because of excess earnings are lost. Conversely, misunderstanding the earnings test could cause some individuals to delay claiming until FRA to avoid a perceived penalty.

Benefits May Be Taxed as Income

Understanding benefit taxation can affect retirement income planning and could, for some individuals, influence when they claim benefits. One study we reviewed that included a question on taxation of Social Security benefits in the phone-survey portion found that 42 percent of the 2,000 respondents ages 25-65 did not understand that benefits could be taxed. Several financial firms include information on taxation on their web pages that cover Social Security.

Life Expectancy and Longevity Risk

Information on life expectancy and longevity risk is fundamental to the decision to claim benefits because a retiree receives benefits until death (and a surviving spouse might then continue to receive benefits until that spouse’s death). Increasing life expectancy, along with increased likelihood of living to advanced ages, and resulting increased time spent in retirement raise the potential cost to retirees of claiming early, and receiving reduced benefits for life, especially if in these later years they have spent down other sources of retirement income. According to SSA’s website, about one of every four 65-year-olds today will live past age 90, and one of 10 will live past age 95. At the same time, longevity depends on a claimant’s health and family history; shorter longevity expectations may cause someone to claim benefits earlier.

Three of the surveys we reviewed asked about longevity, and each of those surveys indicated that individuals might not understand the probability of living to old age and why that is important in their decision to claim benefits. The Financial Literacy Center found that roughly 30 percent of those surveyed indicated they had little or no idea about how long they anticipated living in retirement. A Society of Actuaries survey of 1,600 individuals found that 4 in 10 respondents ages 45 and older underestimated average life-expectancy by 5 years or more. Our interviews with academics who have expertise in Social Security underscored the importance of understanding life expectancy and longevity risk, and in particular the likelihood of living to very old age. One Social Security expert we interviewed said that presenting people with average life expectancy figures may get them to focus on that number but not on the possibility of living well beyond that age. A second expert we spoke with emphasized that using “breakeven analysis”— calculating the age at which the cumulative higher monthly benefits starting later would equal the cumulative lower benefits from an earlier claiming date—is an unsound way to decide when to start benefits. Research shows that breakeven analysis can influence people to claim benefits earlier than they might otherwise, in part because people fear the potential loss of benefits if they die early more than they fear outliving their retirement savings. Breakeven analysis also ignores the insurance value of higher monthly Social Security benefits protecting against outliving one’s other retirement assets, and the potential benefit to a surviving spouse. The second expert said that Social Security is longevity insurance against outliving one’s assets, and therefore, like other insurance, one should base the decision to “purchase” (in this case, by forgoing benefits at a younger age in order to lock in permanently higher monthly benefits) on preventing a bad financial outcome and not necessarily on the likelihood of breaking even.

Financial and Psychological Factors Also May Influence When People Claim Social Security Benefits

Even if people have accurate and complete information, when to claim retirement benefits is a complex and personal decision. Personal circumstances such as health, perceived life expectancy, savings, employment, and other factors can influence when someone claims benefits. In addition, psychological factors can affect how people with similar knowledge and circumstances may make different decisions.

For many people, financial need may make claiming benefits at 62 a necessity. Individuals who are laid off, particularly during periods of high unemployment, those who work in physically demanding jobs they can no longer perform, or those who suffer from poor health may retire earlier than other individuals. Many unemployed older workers may struggle to find new jobs and may face unique reemployment challenges, such as employer reluctance to hire older workers or out-of-date skills. If these older workers cannot find other or more suitable employment and are 62 or older, Social Security may provide their only option for regular income. As a result, they may claim benefits earlier than they had planned, especially if they have little saved for retirement and no pension benefits. On the other hand, among those that have savings, a decrease in their savings might induce them to delay their original claiming date; a 2010 study found that individuals more likely to have retirement savings retire later in response to weak financial markets.

Beyond knowledge of benefit rules and financial need, psychological factors can influence when people claim benefits. Studies have shown that framing—how information is presented—may influence how people perceive Social Security choices, and ultimately have an impact on when they claim benefits. One 2010 study showed that when delaying claiming is framed as a gain (e.g., delaying claiming increases your benefits by $X) rather than claiming early framed as a loss (e.g., claiming earlier reduces your benefit by $X), individuals are more likely to report that they will delay claiming.

Another factor that could lead individuals to claim early is loss aversion— people’s tendency to prefer avoiding losses to acquiring gains of a similar magnitude. If individuals think of Social Security benefits as money they are entitled to once they reach age 62, the loss from delaying claiming— foregone benefits—could carry more weight than a higher monthly benefit in the future if they were to delay. Under loss aversion, dying early without having claimed benefits, as opposed to living longer than expected with reduced benefits, could be seen as a risk to be avoided.

Federal policy may also provide reference points or signals to individuals about the timing of claiming and retirement. The availability of Social Security benefits at age 62 and adjustments to benefits thereafter may give individuals mixed signals about when to claim benefits. A 2012 study found that spikes in retirement claims at the FRA move along with changes in the FRA itself, suggesting that people may see “full retirement age” as a reference point for when they should claim. Finally, uncertainty about future benefits may also influence when people claim. A 2011 study conducted an online survey and found that uncertainty may cause people to claim earlier than they might otherwise in order to lock in benefits.

SSA Provides Key Claiming Information on Its Website and in Publications, but Not Consistently during the Claiming Process

SSA Provides Multi- Faceted Information and Tools to Help People Decide When to Claim Retirement Benefits

SSA provides, through various sources, comprehensive written information to help people decide when to claim retirement benefits. This information includes many of the items identified from our literature review and expert interviews including how claiming age affects monthly benefit amounts, how benefits are determined, details on spousal and survivors benefits, the retirement earnings test, information about life expectancy and longevity risk, and the taxation of benefits. The agency makes this information available through SSA’s website, publications on various topics (available in electronic and paper forms), interactive tools such as online calculators, and a personalized benefit statement mailed to individuals and made available online. The different formats allow this information to be presented in varying degrees of complexity, specificity, and personalization.

SSA Web Pages and Publications

SSA’s web pages and publications cover virtually all information that could inform a person’s decision to claim retirement benefits. For example, the publication When to Start Receiving Retirement Benefits provides an overview of information needed to make the claiming decision, including a discussion of the tradeoffs of claiming benefits earlier versus later, information on life expectancy and longevity risk, how claiming could affect spousal and survivors benefits, and the retirement earnings test. The SSA website also includes pages that cover these topics individually. In addition, the web pages have links to related topics, interactive calculators, and printed publications, making it possible for someone with access to the Internet and comfort with using it to get information on what they need to consider before deciding to claim benefits.

Depending on the source, there are differences in how key information is presented. In the publication Your Retirement Benefit: How It’s Figured, SSA explains that benefits are based on the highest 35 years of indexed earnings, and includes a worksheet for estimating benefits. In Retirement Benefits, however, SSA says only that benefits are based on “lifetime earnings.” While it is reasonable that publications may present similar information in differing degrees of detail, such detail could be important for someone with less than 35 years of earnings. SSA covers longevity risk similarly. In some publications and web pages, SSA covers the personal nature of the claiming decision and notes that as many as one in three 65-year-olds today will live to age 90. At the same time, SSA says that lifetime benefits for anyone who lives to the average life expectancy will be the same regardless of what age they claim; this may run the risk of unintentionally conveying to claimants that the decision on when to claim does not matter. In contrast, when describing the retirement earnings test, a complicated and potentially critical piece of information for someone considering claiming prior to FRA, SSA explains consistently that monthly benefits will increase at FRA if any benefits were withheld due to the test.

Interactive Calculators

To further assist potential claimants, SSA provides 11 interactive calculators on its web site for users to estimate future benefits under varying scenarios, such as at different claiming ages and different earnings levels. These calculators also generally vary in the precision of their benefit estimates. One calculator—the Earnings Test Calculator— estimates the reduction in benefits for individuals who continue to work after claiming, and another—the Benefits for Spouses Calculator— estimates spousal benefits. Others provide FRA or likely life expectancy based on one’s date of birth.

The Retirement Estimator, for example, asks users to enter some identifying information in order to use a secure interface that accesses their earnings history in SSA’s database. In contrast, the SSA online Calculator requires the user to enter earnings from each of their working years in order to determine their estimated monthly benefit. The instructions note the user should have his or her Social Security statement with earnings history available in order to complete the entries. Manually entering several decades of annual earnings can require considerable time, and carries more risk of inaccurate earnings information producing an inaccurate benefits estimate. Unlike the Retirement Estimator, though, the online Calculator gives users the option of having the estimated benefit amount given in either current or future dollars. Both calculators also can be used to estimate benefits at different retirement ages.

Other calculators focus on more specific factors that can affect benefits. An Early or Late Retirement Calculator provides an estimate of how much less a user’s benefit would be if the user claimed earlier than FRA. Others focus on the effect of the retirement earnings test or the Government Pension Offset (GPO) or Windfall Elimination Provision (WEP), which affect benefits for an individual receiving a pension from a job that was not covered by Social Security.

Social Security Statement

The Social Security statement is the most widespread piece of communication that SSA provides to individuals about their future benefits. It is a 4- to 6-page summary of personalized information that includes an estimate of the individual’s future benefit payable at age 62, FRA, and age 70, as well as estimates for the individual’s current disability and survivor benefit amounts. In 1995, SSA began mailing annual statements to individuals in selected age groups, beginning with those 60 and over. By 2000, statements were generally mailed to all eligible individuals 25 and older. In May 2012, SSA made the statement available electronically for those establishing an online account. Since September 2014, SSA has mailed printed statements to eligible individuals age 25, 30, 35, 40, 45, 50, 55, and 60 or older who have not created a personal online Social Security account. At age 60, SSA sends the statement annually. The statement has three versions, one each for those ages 25 to 34, 35 to 54, and 55 and older, with certain information tailored for each group. For example, the statement for the age 25-to-34 cohorts has a section titled “Why should I think about retirement now?” For those 55 and older, there is additional information on monthly benefit amounts at different claiming ages and working while receiving benefits.

In addition to benefit estimates, the statement shows the individual’s history of earnings on which he or she paid Social Security (and Medicare) taxes, and total taxes paid. It also explains how people qualify for benefits, assumptions SSA uses in their benefit estimates, and information on the GPO and WEP provisions that generally apply to people who receive pensions from non-covered employment. For those 55 and older, a section on the retirement earnings test explains that some benefits can be withheld from workers under FRA who earn over a certain amount, but goes on to explain that at FRA the worker’s benefit amount will be increased to account for the benefits that were withheld. The statement does not, however, include some basic information that may help people understand some critical details about their benefits. Specifically, while the statement includes an example of how a claimant’s monthly benefits would differ based on age when claiming, it does not make clear that the monthly benefit amount at claiming is permanent, except for cost-of-living adjustments. An SSA official said that a common misunderstanding by statement recipients is that a claimant will receive higher amounts as they get older even if they claim benefits at 62. Further, even though a section of the statement is titled “How Your Benefits are Estimated,” it does not explain that benefits are calculated based on the individual’s highest 35 years of earnings. It also does not say that an individual’s claiming age affects not only his or her own benefit but potentially a spouse’s survivor benefit. Finally, the statement does not mention that benefits, once they are received, may be subject to income tax.

According to various studies and surveys that looked at the statement, individuals who received the Social Security benefits statement were, in general, more knowledgeable about Social Security. According to SSA in 2012, surveys SSA has conducted found that 70 percent of respondents age 60 and older said they had enough information about Social Security from the benefits statement to plan for their financial future. However, SSA’s studies did not assess whether receipt of the statement changed behavior. A 2015 academic brief that reviewed additional studies reported they did not find that the Social Security statement affects claiming behavior.

Claims Process Sometimes Does Not Provide Key Information That Could Help People Decide When to Claim Benefits

While SSA provides important information through its website and publications to help people make informed decisions about when to claim benefits, our observation of the online and in-person claims process found that some key information may not be consistently provided to potential claimants when they file, particularly during in-person interviews. SSA’s Program Operations Manual System (POMS) states that claims specialists are to provide information, and avoid giving advice, to claimants. The POMS also specifies that when taking an application for Social Security benefits, the claims specialist is responsible for explaining the advantages and disadvantages of filing an application so that the individual can make an informed filing decision. However, our observation of a nongeneralizable sample of 30 face-to-face claims interview at 7 SSA field offices found that claims specialists did not consistently provide key information to potential claimants, or ensure individuals were aware of such information when they applied for benefits. The SSA claims protocol follows a screen-by-screen process of questions and prompts to collect basic information from claimants, but does not prompt questions or discussion of some key information. Compared to the in-person process, online applicants have more consistent access to key information on the screen or through tabs and pop-up boxes as they complete the application. Even so, the online process also left out potentially important information that could inform an individual’s decision to claim benefits. Furthermore, for both face-to-face and online application methods, we found claimants were sometimes provided information that could inadvertently influence them to claim earlier than they might have otherwise.

In-Person Claims

Over 36 percent of people claiming retirement benefits in 2015 did so in person at an SSA office. During the in-office claims we observed, claims specialists followed an automated step-by-step process for collecting and confirming basic information from potential claimants to ensure they qualify for Social Security benefits and to determine the benefit amount. Such information included confirmation of a claimant’s birth date, marital status, earnings history, and any receipt of pension benefits from an entity that did not participate in Social Security, among other information. This process also included prompts to provide information or ask questions about certain types of benefits, such as qualification for spousal benefits, and key program rules, such as the retirement earnings limit for claimants who are younger than FRA. However, in the in-office claims interviews we observed, the discussion did not include questions or prompts about other key program rules and information that could help inform the decision to claim benefits. For example, claimants were not consistently informed that monthly benefit amounts would be higher if the claimant waited, as specified in POMS. Similarly, the protocols did not prompt claims specialists to provide information on how working longer prior to claiming might raise monthly benefits, or how personal circumstances such as health, life expectancy, and longevity risk can factor into the decision on when to start benefits. Claims specialists generally provided accurate information about program rules and benefits and answered claimants’ questions. In some instances, however, they presented or omitted key information in a way that could confuse or even bias people’s claiming decisions. We discuss areas of key information, and how we observed they were covered in in-person claims, below: How claiming age affects monthly benefits: POMS states that claimants filing for benefits should be advised that higher benefits may be payable if filing is delayed. It also states that claimants should, if applicable, be provided with at least three monthly benefit amounts at three different claiming ages—at the earliest possible month for claiming, at FRA, and age 70. Claims specialists should provide amounts for other months as well if requested by the claimant. In 18 of 26 interviews we observed in which delaying claiming was a potential choice, the claims specialist mentioned that the claimant’s benefit amount would be higher if he or she delayed claiming. However, the remaining 8 did not discuss this option. Of the 18 interviews that mentioned delayed claiming, 13 claims specialists presented at least the three benefit amounts per POMS, while 5 did not. Surveys have shown that most individuals do not know how much monthly benefits can increase by waiting to claim, so offering benefit estimates at different ages is likely to provide information many claimants do not have. This information can influence the age at which they claim, and expert opinion and past GAO reports found that delayed claiming can be an important strategy to consider for most retirees.

In 10 of the 30 observed interviews, claims specialists offered the opportunity to claim up to 6 months of retroactive benefits as a lump sum. SSA allows for up to 6 months of retroactive benefits when a claimant is at least FRA or has a “protective filing date”—a documented date within the 6 months prior to a claims appointment when a claimant first contacted SSA about filing a retirement claim. While retroactive benefits offer an attractive lump sum, taking it essentially means applying for benefits up to 6 months earlier, and results in a permanent reduction in the monthly benefit amount. POMS provides eligibility criteria for retroactive benefits. However, POMS does not instruct claims specialists to inform claimants that taking lump-sum retroactive benefits will result in permanently lower monthly benefits, compared to not taking retroactive benefits, a tradeoff claimants may not be aware of. The claims specialist explained this tradeoff in only 1 of the interviews we observed. In another interview, a claimant who initially said he wanted benefits to start later in the year changed his mind to start 6 months earlier after being offered a lump sum.

During our observations, we also saw 6 instances in which a claims specialist presented a breakeven age—the age at which the cumulative higher monthly benefits starting later would equal the cumulative lower benefits from an earlier claiming date—to help a claimant compare claiming benefits now or waiting to claim. According to POMS, claims specialists “should no longer discuss with claimants,” and research shows that breakeven analysis can influence people to claim benefits earlier than they might otherwise. In some interviews, however, claims specialists not only offered a breakeven year, they added their conclusion that the analysis showed that claiming earlier was preferable. One claims specialist showed the claimant that it would take 11 and 1/2 years to make up the difference for waiting to claim, and added that “according to the actuaries, that is a reasonable choice.” Another claims specialist said the breakeven analysis showed “it pays to file early.” In a seventh interview, breakeven had been discussed before the claimant came into the local office. The claimant said he had been planning to wait until age 70 to claim, but had been told by an SSA representative over the phone that his breakeven age analysis suggested he should claim earlier. While our observations are not generalizable, they suggest that SSA may be inadvertently influencing people’s decisions on when to claim and lowering claimants’ monthly benefit amounts. The 2011 SSA Office of the Inspector General report concluded that SSA needed to better explain to its claims specialists why the agency believes breakeven points are not relevant to a claimant’s decision.

How lifetime earnings affect benefits: We observed only 8 interviews in which a claims specialist mentioned that benefits are based on 35 years of earnings and that working longer could potentially raise benefits by boosting average lifetime earnings. While POMS does not require claims specialists to explain how earnings affect benefit amounts, the claims process could be modified to include prompts for claims specialists to inform claimants that benefits are based on 35 years of earnings— information that SSA already makes available on its website. By discussing how years of earnings are calculated to determine one’s benefit amounts, claims specialists might better inform claimants who are deciding when to claim, especially for those who have less than 35 years of earnings.

Spousal benefits: The majority of claims specialists we observed compared the amount the claimant would receive as a spouse versus the amount based on his or her own earnings history, when applicable. However, in 8 of 15 interviews in which the claimant was potentially eligible to claim restricted spousal benefits or to file-and-suspend, the claims specialist did not mention these options. To their credit, 4 claims specialists we observed explained that while spousal benefits were currently lower than the claimant’s own benefit, taking the lower spouse benefit now and waiting to claim their own would increase the claimant’s own benefit by 8 percent per year after FRA and up to age 70. As a result of the explanation, 2 claimants decided to take their spousal benefits at or older than FRA and wait to take their own benefits at age 70.

Retirement earnings test: In our observations, the step-by-step SSA claims process for a claimant younger than FRA included questions about plans to continue working. In the 18 interviews we observed in which a potential claimant was younger than FRA, 17 claims specialist explained, accurately, that the claimant would have benefits withheld if he or she earned more than the retirement earnings limit. However, in only 7 of these 17 interviews did the claims specialists explain that any benefits withheld due to earnings would be recalculated and result in higher benefit amounts after FRA. For the remaining interviews, the claims specialists mentioned only that earnings may result in lower benefits, or that the claimant cannot earn above the limit, perhaps inaccurately suggesting the earnings test would result in a permanent loss of benefits. In one interview, a claims specialist told the claimant she would be “penalized” if she earned over the limit. POMS states that, when applicable, the claims specialist should explain to claimants that earnings could be withheld based on the annual earnings test, but does not instruct claims specialists to explain that the earnings test is not a penalty or tax, or that withheld benefits are repaid. However, if claimants do not understand the full implications of the earnings test, they could erroneously think it will result in a permanent loss in benefits and, as a result, unnecessarily stop working or reduce their working income. This was made clear in one interview in which a claimant with earnings likely to be above the limit said she might have to quit one of her two jobs unless she waited until FRA to claim. Ultimately, the claimant decided to wait until she reached FRA and then start her benefits. This case illustrates the potential risks of SSA not making clear to claimants that the earnings test does not represent a permanent loss in benefits.

Taxation of benefits: That Social Security benefits are potentially subject to income tax did not routinely come up in the interviews we observed. While some claimants asked about withholding taxes from their Social Security benefit checks, in only two instances did a claimant ask if benefits themselves are taxable. In these instances, the claims specialist told the claimant the benefits could be taxable. One claims specialist also suggested that the claimant discuss this issue with their tax professional. Furthermore, in both instances, the claimants did not realize that their benefits can be taxed. POMS states that claims specialists “will not answer questions about taxation,” and says they should refer individuals inquiring about taxation of benefits to IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, for additional information.

However, a general explanation of taxation can be provided as it relates to month of election and suspension or withholding of benefits to recover overpayment. A lack of information about the taxability of benefits could potentially affect the retirement planning of claimants.

Life expectancy and longevity risk: Claims specialists are not prompted to ask for or provide any information to claimants about life expectancy or longevity risk. Only twice in our 30 observations did family health and longevity arise and how it might factor into when to claim benefits, both times because the claimant raised the subject. While claims specialists are not specifically required to discuss life expectancy and longevity risk, the POMS does state that information should be provided to help claimants make informed filing decisions. SSA also emphasizes the importance of considering life expectancy and longevity risk in information made available on its website. According to the American Academy of Actuaries and the Society of Actuaries, understanding how longevity, and in particular longevity risk, can impact retirement planning is an important aspect of preparing for a well-funded retirement.

While time constraints may increase the pressure on claims specialists to manage their claims case load, we detected no systematic way that these constraints would push specialists to withhold key information from claimants. In general, the claims specialists we interviewed told us that they did not feel pressured by management to process a specific number of claims in a day, nor to limit the time they spent with claimants providing information and answering claimants’ questions. Field office managers told us that their offices faced monthly performance goals for processing claims efficiently and accurately; and both managers and claims specialists acknowledged that some days present time constraints in serving all potential claimants. However, managers and claims specialists said they did not feel pressure to convince any people to claim benefits when they came in for a claims interviews or inquiry.

While we did not examine training in depth, SSA officials said claims specialists receive about four months of classroom training on processing claims and have a regular review of claims they handle during their first year. In addition, claims specialists have additional resources to help them if questions arise during claims interview or inquires, including ready access to POMS and the ability to ask questions of onsite SSA technical experts. Our observations confirmed that claims specialists were able to spend as much time as claimants required for answering questions.

Online Claims Process

According to SSA, over 40 percent of people claiming retirement benefits in 2015 did so online through its website. SSA provided us a screen-by- screen demonstration of the online claiming process. In addition to collecting information from the claimant, the online process offers opportunities for the claimant to receive certain key information on the screen via links to SSA web pages and in pop-up boxes. In contrast to the in-person claims process, the online process includes screens that provide information on how claiming at different ages raises or lowers monthly benefits, and that any benefits withheld because of the retirement earnings test will raise monthly benefits after FRA. For example, one online screen asks the claimant to indicate when he or she would like to start taking benefits, and explains that if the claimant chooses to start receiving benefits early, before FRA, monthly benefits will be reduced. In another online screen, SSA explains that any benefits withheld because of the annual earnings test will raise monthly benefits after FRA. Similar to in-person interviews, however, the online application process does not inform claimants that benefits are based on the highest 35 years of earnings; that life expectancy and longevity risk are important considerations in deciding when to claim; and that benefits may be taxed. And, as with in-person claims, the online claims process may inadvertently influence people’s claiming age through the information it presents. For example, if a claimant has the option of starting benefits retroactively (i.e., taking a lump sum), and chooses not to, the online process asks the claimant to provide a reason. This step runs the risk of making the claimant believe he is making an unusual decision, or a mistake, by choosing a later claiming date.

Conclusions

Many American retirees rely greatly on Social Security, making it imperative that they have the information they need to make wise claiming decisions. Therefore, it is important that claimants understand key SSA rules and consider other factors that can assist them in making informed decisions about when to claim. For many people, SSA may be their only source of information when making the important decision of when to claim retirement benefits. Though we found SSA’s claims process largely provides accurate information and avoids overt financial advice, certain key information is not provided or explained clearly during the claims process. POMS specifies that claims specialists should explain the advantages and disadvantages of filing for Social Security benefits to help individuals make informed filing decisions. However, because SSA is not fully operationalizing this guidance in the claims interviews, some claimants do not receive all the information that is critical to making informed claiming decisions. While SSA offers key retirement planning information on its website and in written publications, it cannot be assumed that potential claimants have obtained, read, or understood it when they actually claim benefits, especially given documented gaps in people’s knowledge about Social Security.

Claims specialists we observed performed their jobs with professionalism and seemed very willing to help people navigate a complicated decision by providing accurate information and answering questions. However, in some areas, such as benefits of delayed filing and the inappropriate use of breakeven analysis, information was sometimes not provided consistent with POMS. Additionally, the claims interview could better inform claimants that benefits are based on 35 years of earnings, that benefits withheld due to the retirement earnings test are accounted for after FRA, that taking lump-sum retroactive benefits reduces future monthly benefits permanently, and that life expectancy and longevity risk should be a consideration in a person’s decision to claim. The claims process, either in person with a claims specialist or online, allows for SSA to add additional questions or prompts—potentially using language SSA already provides on its website and in publications. This information would help each individual receive the information they need to make an optimal decision. While we recognize that SSA claims specialists face time constraints in processing claims, providing such information would not necessarily add much time to a typical claim or inquiry. In some cases, such as with breakeven ages, claims specialists could actually save time by providing less information than they do. Given the near- universality and broad dependence on Social Security for retirement income, improving the claims process could have a significant impact on people’s retirement security.

Recommendations for Executive Action

To ensure that key information provided by claims specialists to potential claimants of Social Security retirement benefits is clear and consistent with POMS, the Commissioner of the SSA should take steps to ensure: when applicable, claims specialists inform that delaying claiming will result in permanently higher monthly benefit amounts, and at least offer to provide claimants their estimated benefits at their current age, at FRA (unless the claimant is already older than FRA), and age 70; and claims specialists understand that they should avoid the use of breakeven analysis to compare benefits at different claiming ages.

In addition, to ensure potential claimants are consistently provided with key information during the claiming process to help them make informed decisions about when to claim benefits, SSA should take steps to ensure that: when applicable, claims specialists inform claimants that monthly benefit amounts are determined by the highest (indexed) 35 years of earnings, and that in some cases, additional work could increase benefits; when appropriate, claims specialists clearly explain the retirement earnings test and inform claimants that any benefits withheld because of earnings above the earnings limit will result in higher monthly benefits starting at FRA; claims specialists explain that lump sum retroactive benefits will result in a permanent reduction of monthly benefits. For the online claiming process, SSA should evaluate removing or revising the online question that asks claimants to provide a reason for not choosing retroactive benefits; and the claims process include basic information on how life expectancy and longevity risk may affect the decision to claim benefits.

Agency Comments and Our Evaluation

We provided a draft of this report to SSA for review and comment. SSA generally agreed with our recommendations. SSA’s comments are reproduced in appendix IV. They correctly noted that some of our recommendations apply only to certain claimants; for example, additional information on the retirement earnings test would be important to provide only to a claimant who is younger than FRA and who intends to work after claiming. SSA emphasized that their claims specialists are not equipped to serve as financial advisors, and that claimants must select the age that is best for them based on their individual circumstances. We agree, and believe that our recommendations are consistent with the principle of providing important information—not financial advice—to claimants. To the extent that SSA can incorporate the information we recommend into the claims process, we believe that this will improve the likelihood that claimants consistently receive the information they need to decide their own optimal claiming decisions. SSA also provided technical comments, which we incorporated as appropriate.

We are sending copies of this report to the Commissioner of the Social Security Administration, appropriate congressional committees, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

In this report, we examined: (1) the extent to which people understand Social Security rules affecting their benefits, and other factors that may influence when they claim retirement benefits; and (2) the information that the Social Security Administration (SSA) provides to individuals inquiring about claiming that enables them to make informed claiming decisions. We conducted this research from July 2015 to September 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence we obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

To address our objectives, we applied several methods for collecting and analyzing relevant information, as described below.

Identification and Review of Applicable Law and Regulations

We reviewed relevant federal laws and regulations for requirements relating to SSA providing the public with information about retirement benefits. Additionally, we reviewed relevant sections of the SSA Program Operations Manual System (POMS), a primary source of information used by SSA employees to process claims for Social Security benefits. We also interviewed SSA headquarters officials and District managers in seven field offices to learn how Social Security retirement benefit claims are processed.

Literature Search and Expert Interviews

Using the Internet and expert referrals, we found and reviewed surveys and academic studies that assessed understanding of Social Security benefits and identified the factors that influence claiming. The search comprised publications from GAO reports, other government agencies, research organizations, scholarly journals, and the financial industry from 2010 to 2015. Of the studies we found, nine were most relevant to our work. These studies are described in appendix II. We also interviewed a judgmental selection of Social Security experts from academia, public policy organizations, and financial firms to obtain their views on how SSA could provide information to better inform people about claiming benefits. Based on our review of studies and on expert interviews, we identified key information categories that are central to making an informed decision about when to claim retirement benefits.

Review of SSA Publications, Web Pages, and Calculators

We identified materials to review from our own examination and search of SSA’s website. We reviewed SSA’s publications, web pages, and calculators that provided information related to understanding and filing for retirement benefits, including how benefits are calculated. We reviewed each of the publications and web pages and assessed how they addressed each of the key information components we found from our literature review and expert interviews that were not well understood by prospective claimants. A second reviewer verified any initial assessments that were used in this report. We reviewed the calculators to see if, collectively, they addressed each of the key information categories.

Observations of Claims Process at Field Offices and Online

We observed a demonstration of SSA’s online retirement claims process and a nongeneralizable sample of 30 face-to-face claims applications and inquiries at 7 SSA field offices. We identified the local SSA offices where we would observe the retirement claims process, taking into consideration regional geographic diversity, income level, urban and rural composition, and the number of new claims each office processes. SSA headquarters provided local office data from each of the 10 SSA regions. After reviewing those data and considering logistical issues, we selected 7 offices in the Philadelphia, Chicago, and San Francisco regions. We used SSA data to identify local offices with high volumes of inquiries and visits. We then looked at the number of retirement claims those offices were processing and considered thoughts of SSA regional and field office officials about pros and cons of each local office we had preliminarily chosen, such as foot traffic or appointment schedules. Based on our discussions with SSA headquarters and regional officials, and our analysis of data on the field offices, we selected SSA field offices in Alexandria, VA; Winchester, VA; and Arlington, VA (Philadelphia region); San Francisco, CA and Santa Rosa, CA (San Francisco region); and Mount Prospect, IL and Hillside, IL (Chicago region). We conducted these site visits from March to May 2016.

At our site visits, we observed SSA claims specialists handle claims intakes or inquiries from claimants for retirement benefits (including for survivors and spousal benefits). We noted the elements of the claims process and information the specialists provided to claimants during this process and evaluated what we observed against POMS guidance and to determine how specialists were addressing the six key information categories we identified from our literature review and expert interviews. We also interviewed managers and claims specialists at these offices about the process for completing retirement benefit claims, training on completing claims applications, and how claims specialists’ performance is evaluated.

To learn about the online claims process for retirement benefits, we observed a screen-by-screen demonstration by an SSA official covering the steps of a retirement claim, and asked the official questions about the process and the information provided. We did not observe an actual online claim, but saw all the screens that potential claimants see and the steps that they follow when a retirement claim is filed online through SSA’s website.

Appendix II: Selected Surveys and Studies, 2010-2015

Appendix III: Social Security Administration Online Calculators to Assist in Filing

Appendix IV: Comments from the Social Security Administration

Appendix V: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

Michael Collins (Assistant Director), Mark Glickman (Assistant Director), Laurel Beedon, Lilia Chaidez, Susan Chin, and Joel Marus made significant contributions to this report. In addition, support was provided by Susan Aschoff, James Bennett, Deborah Bland, Scott Clayton, Alexander Galuten, Teresa Heger, Tom Moscovitch, Ardith Spence, Frank Todisco (Chief Actuary), and Walter Vance.

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