The Simplest Fix to Social Security

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By Kelly Holland

You would think sharing information about Social Security benefits would be simple. After all, the system is pretty straightforward: You contribute while you work, and after you retire you collect until you die. But when it comes to Social Security, simple is not even in the same room.

The Social Security statement people now receive is one example. It provides clear data points, like projected benefits at age 62, 66 and 70. But even so, it is the subject of intense scrutiny as experts sort out how details of its format and content affect when people file for benefits.

For example, people who wait to claim their benefit at age 70, instead of when they are first eligible at age 62, can see their check increase some 76 percent. For many, that's the optimal plan. But few people do this, and experts suspect the content and form of the Social Security statement could be one reason why.

"A lot of the information is buried in a table. A good designer could really design the presentation of information and could make the gist of the information presented in a much more clear way," said Steven Sass, a research economist at Boston College's Center for Retirement Research.

%VIRTUAL-pullquote-The first thing the statement should make clear is there are two separate decisions: When do you retire and when do you start claiming Social Security?%John Shoven, director of the Stanford Institute for Economic Policy Research, takes issue with what he views as the conflation of retirement and Social Security claiming on the statement.

"Sometimes they use the word 'retirement' as if that's the same as collecting Social Security," he said. "The first thing the statement should make clear is there are two separate decisions: When do you retire and when do you start claiming Social Security?"

Shoven has studied the optimal time to claim Social Security benefits, and he believes that for almost everyone, it pays to wait as long as possible. As a result, how the Social Security statement frames the pros and cons of different claiming choices "makes a lot of difference," he said.

"If you tell somebody 'if you delay it will take you 12 or 14 years before you break even, they may choose not to delay. If you frame it saying how much higher the monthly benefit would be or what the expected rate of return would be for somebody like you, you get a different answer," Shoven said.

Others argue that by presenting benefits information as just static numbers can lead people to alter their behavior in ways that can harm their retirement finances. Philip Armour, an associate economist and professor at Pardee Rand Graduate School, has compared how people behaved when they received their first Social Security statement to what they did on receipt of their second. The statements include a person's projected benefit, assuming they continue earning at current levels.

On average, people cut their work hours by 119 hours a year after receiving their first statement, apparently assuming their benefit was locked in, Armour found. Reductions were most prevalent among older, educated workers who were working relatively long hours. People not working or working part time were more likely to increase their hours, but work hours declined for recipients overall.

Benefits aren't locked in, however, and workers can keep adding to (or reducing them) as long as they continue in the labor force. When workers received their second statement, Armour found that some of the behavior changes reversed.

Armour believes an online tool that would let people try out different scenarios would lead to smarter working and claiming behavior. He said: "At the the very least, if it's going to stay a paper document, have a 'well, if you earn 50 percent more from now forward what will happen to your benefits' and 'if you earn 50 percent less what would your benefits be?' "

Ben Stump, a Social Security Administration spokesman, said "the best age to start retirement benefits is a personal decision for every individual, based on a number of considerations including present and future financial circumstances, current health and life expectancy. There is not a single 'best age' for everyone, so Social Security provides many tools to help people make an informed decision about when to apply for benefits." he said, "We are continually working to improve the services we provide." The Social Security Administration's website provides retirement estimators,calculators and benefit planners along with a section for frequently asked questions.

Researchers have found that the Social Security statement does have a noticeable effect on participants -- but only to a point. Giovanni Mastrobuoni, director of research students in the economics department at the University of Essex, studied the effect of receiving Social Security statements and found that they did increase knowledge of benefits. However, he concluded the benefits statement had "no impact" on retirement behavior.

Return on Investment

Experts also argue for framing Social Security choices differently.

For example, Armour pointed out defined contribution retirement plans, such as 401(k) plans, send regular statements showing the rate of return on the various investment choices beneficiaries have. A Social Security statement presenting the benefit of delayed claiming as a rate of return might make more people compare the two and realize that the return on waiting to claim Security exceeds the return on other low-risk investments, he said.

"If they could provide a number that's more comparable" to 401(k) plan investments like bond funds, "I think that would make it clearer that for some people there are definitely incentives to delaying claiming until after full retirement age," he said.

Sass thinks the statement would encourage later claiming if it focused less on full retirement age, typically 66, and more on benefits at age 70. Say "that if you claim at 66 you will get a third more than at 62 and if you claim at 70 you get 76 percent more," he recommended. "When you tell people that, people are shocked and surprised. They really get the understanding that delay is powerful. When you center on full retirement age, you get 25 percent less, 35 percent more -- a moderate number doesn't really grab you by the lapels," he said.

Retirement security revolves around three issues, according to Sass: how long you work, how much you save (and thereby move to a more sustainable standard of living), and how you deal with your home. In Sass' view, a revised Social Security statement could encourage to work longer, and if it did, it would make a significant difference in retirement savings for most people.

"When to retire is not really seen as a key decision in your retirement finances," he said. "There is nothing you can do with saving and investing that would move the needle like working longer."

This is the third part of a week-long CNBC.com series on the state of Social Security on its 80th anniversary.


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