January 12, 2016 Reading Time: 4 minutes

Forest is an intern from Monument Mountain High School in Great Barrington, MA. He plans to study business and engineering in college starting next fall.

We are all reasonably familiar with the idea of Social Security: You pay money in while you’re working and you get something back when you’re retired. But the system is complex, and even the most basic rules are misunderstood by a large segment of the population.

A recent survey by AARP and the Financial Planning Association  found some serious deficiencies in knowledge about Social Security:

  • Only 9 percent of people actually believe they have a solid understanding of how Social Security benefits work.

Probably the most important thing to understand is how your monthly benefit is determined. It is based on how much you made over the course of your career. As long as you have 40 quarters of qualified earnings (10 years), you have earned a benefit from the system.

For people that make more money, the dollar benefit is higher, but on a percentage basis, Social Security benefits are progressive. That means the system pays back a higher percentage for lower earners. On average, a low earning worker will receive a Social Security benefit that replaces about 57 percent of pre-retirement earnings (“replacement rate”). A medium-income worker can expect a benefit that replaces 42 percent of pre-retirement earnings, and a high earning worker will receive 35 percent.

  • Two in 10 Americans ages 45 to 64 believe they cannot collect benefits before age 65.

The early claiming age is actually 62. However, the age at which you start receiving benefits affects the amount you receive. The full retirement age is currently 66 and will rise to 67 for younger people. You can check here to view your full retirement age based on your birth year. However, when you collect early, your benefit is penalized. The later you claim, the less you are penalized. If you delay collection beyond your full retirement age and up until age 70, you can receive delayed retirement credits that increase your benefit.

  • Two-thirds of people underestimate the potential increase in benefits by waiting from the early retirement age of 62 until the full retirement age of 66.

Most economists agree that delaying the collection of benefits is financially savvy. At your full retirement age, you receive 100 percent of your earned benefit. You are penalized for early collection, with a penalty of 25 to 30 percent (depending on birth year) if you were to start collecting at 62. Furthermore, waiting past the full retirement age can give you an additional percentage for every month up to the maximum age of 70. This could give you as much as an additional 32 percent, for a total benefit of 1.32 times the amount you would have received had you claimed at the full retirement age.

For example, let’s say Bob is about to retire, and his benefit at the full retirement age of 66 is $2,000 per month. If he were to instead begin collecting at age 62, his benefit would be reduced to $1,500. Waiting until age 70, on the other hand, would result in a monthly benefit of $2,640. The difference between claiming at age 62 versus age 70 is $13,680 per year!

Moreover, delaying benefits and continuing to work can increase benefits even more by increasing your average lifetime earnings.

  • Only half of respondents who have been married know that they can receive Social Security benefits based on their spouse’s work history, even when the spouse is alive.

For married workers, benefits are calculated the same as for singles, but with an added advantage that a spouse — regardless of their work history — may claim a spousal benefit. The spousal benefit can be up to 50 percent of the primary earner’s full retirement benefit. This means that a primary earner with a $2,000 full retirement benefit can have a spouse collect $1,000 per month at full retirement age, regardless of whether the spouse worked at all. If the primary earner delays until age 70, the total benefit for the couple could be $3,640 ($2,640 + $1,000) per month in retirement even when one spouse never worked in the paid labor market…certainly not a trivial amount!

Social Security also provides an important benefit for widows and widowers, up to 100 percent of the primary earner’s benefit in addition to any extra the deceased may have earned due to delayed retirement credits. This is another advantage to delaying benefits for the primary earner. By maximizing the primary benefit with delayed retirement credits, the spouses will receive higher benefits so long as at least one of them is alive.

  • Nearly 65 percent of people either are misinformed or not aware that they can collect spousal benefits after divorce.

A divorced spouse can claim spousal benefits as long as the marriage lasted at least ten years. To claim these benefits, the other former spouse must have already filed, or the divorce must be at least two years old. Like spousal benefits, ex-spousal benefits can be up to 50 percent of the primary earner’s benefit and do not receive delayed retirement credits.

  • 57 percent of people believe their money is permanently lost due to the earnings test.

Some people will choose to begin collecting benefits while still working. If you are under the full retirement age, the Social Security Administration will reduce your monthly benefit (in addition to the penalty for claiming early) based on earnings. However, those benefits are not lost. They are merely withheld until you reach your full retirement age. At that point, any withheld Social Security will be recalculated into your benefit as if you had not claimed at all. After the full retirement age, any earnings from work will not reduce your benefit.

There are a significant number of factors to consider before you begin collecting Social Security. Waiting until age 70 can maximize benefits for individuals and married couples, while non-working spouses, ex-spouses, and survivors max out benefits when they reach full retirement age. Either way, delaying past age 62 is a wise economic choice for most households. Decisions around Social Security claiming are some of the most important you will make as you approach retirement age, and having the proper information to make these decisions is essential to maximizing benefits and assuring your financial security.

Some helpful online resources:

Social Security website: https://www.ssa.gov/

AARP’s Social Security page: http://www.aarp.org/work/social-security/

Web site of Jim Blankenship (a Social Security guru): http://financialducksinarow.com/


Blankenship, Jim, CFP. A Social Security Owner’s Manuel. 3rd ed. 2014.

Perron, Rebecca, MPH, PhD. “Social Security Planning in 2015 and Beyond.” AARP.org.

Alicia Munnell and Mauricio Soto, “Sorting Out Social Security Replacement Rates,” Boston College Center for Retirement Research.

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