MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research, and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision-making and the cognitive and emotional biases that can cloud our judgment.
In this episode, we've got a hot topic that, for some, gets hotter as they get older: Social Security.
According to the U.S. Census, as of 2020, there were 56 million people in America who were 65 years or older. That's one in six people.[1]
Contrast this to 1920—back then, the proportion 65+ was less than one in 20.1
We're living longer, but the issues that arise around taking care of older people have been around since the dawn of humanity.
The strategies have been varied. Some people saved up money, some relied on family and friends. Other relied on religious groups, charities, fraternal organizations, and the like.[2]
Those strategies are fine, but let's face it. Saving for retirement wasn't that complicated in, let's say, 1850 because life expectancies were so short. To give you some sense of this, if you were born in 1850, your life expectancy was 38 years if you were male and 40 years if you were female.[3]
But we kept improving health care, sanitation, and we probably flossed more. The result was that we lived longer.
By 1935, the combination of increased lifespans ran into the reality of the Great Depression.
The solution to the problem of age-old poverty was the Social Security Act of 1935. It was very different from what we know today, with limited coverage and stingy benefits. But it was a start.
The first payment was made to Ernest Ackerman, a streetcar motorman in Cleveland. He made $5 a day and paid one nickel in payroll tax. He received a one-time check from Social Security for 17 cents.1
A lot has changed since then to get to the Social Security system we have today. The basic premise is the same, though.
During your working years, you pay a percentage of your salary into Social Security, and your employer matches that. If you're self-employed, you pay both charges.
When you retire, you collect a certain amount every month depending on when you retired and how many years you made contributions.
Just as Social Security has evolved over the years, so have the decisions around it. When should you take your benefits? How does it fit into your portfolio? How does it fit into your retirement strategy? How about the rest of your portfolio? Lots of questions arise and it can be confusing.
Which is why I am revisiting a conversation I had with Rob Williams about these very same questions. Rob heads the Financial Planning, Retirement Income, and Wealth Management team here at the Schwab Center for Financial Research.
After that, I'll be unpacking some of the biases and misconceptions that might afflict a retiree's Social Security strategy in a sit-down with my colleague Susan Hirshman. But first, here's what Rob had to say.
Rob, I appreciate you coming by today.
ROB WILLIAMS: Thanks, Mark. Great to be here.
MARK: So let's start out with the fact that if you claim benefits sooner, your checks are lower than if you claim benefits later. How long does it take to break even once you delay withdrawing?
ROB: Thanks, Mark. That's a great place to start. And as you said, if you start taking Social Security earlier than your full retirement age, it does reduce your monthly check. But that's because you're receiving Social Security checks for a longer time. On the other hand, taking Social Security later means receiving fewer checks during your lifetime, but the checks will be a lot larger. So the break-even is the age when you start to come out ahead and the cumulative benefits you receive if you wait.
And it's tempting to get deep into the math, but a quick example should give us the idea. If you wait until age 66 to claim benefits versus taking at age 62, you'll break even at around age 76. So that's more than a decade before you'll start to see the payoff from waiting.
MARK: So where did 76 come from?
ROB: Well, that just comes from the math, and it comes from the Social Security Administration, who's planned it so that in theory, the break-even point is about the average American's life expectancy.
So if you live exactly as long as the actuarial scientists deep in the basement of the Social Security Administration would suggest—in this example, 76—then you'll come out even no matter if you file early or at full retirement age. The benefit to waiting kicks in if you live longer than what the actuarial scientists project. So every check will be bigger, and you'll receive more income over time.
MARK: So if I was going to claim at 62, but instead I wait until 66, it's going to take me until 76—another ten years—to break even. So that's about a 14-year time period there. That seems like a long time. I hear those numbers, and I can see why so many people are eager to start collecting as early as they can. Is it reasonable for people to expect that they'll be living that long?
ROB: Well, it's understandable, and this is certainly one of the major biases. For a lot of people, including me, waiting any length of time to receive a benefit can seem like forever. You're going to wait for more than a decade for the so-called break-even point, and you won't receive payments early.
So it's kind of a double whammy. But actually, it's likely that if you're in good health, you'll live longer because averages are averages, and by definition, 50% of individuals are going to live longer. And if you're one of them, you'll end up collecting more.
MARK: I think that's really important. 50% of people are going to be living longer than the average life expectancy. So I have a couple of questions about that.
First of all—every year I read that life expectancies are going up and up and up. Are the tables kept up to date?
ROB: Well, I said earlier, in theory, that the break-even point is about your life expectancy. But there's a lot of good evidence that when the Social Security Administration created those schedules, they underestimated how long you live.
First of all—they were created back in the 1950s, and life expectancy has increased significantly since then. So it's not intentional. They just haven't updated those numbers. The life expectancy today of the average 62-year-old American male is 83. For the average 62-year-old female, it's 86. So remember what I said before—the break-even age in the example we used was 76.
So the numbers show that today, there's a really good chance you're going to live longer than those numbers. In fact, 25% of women who reach 62 will make it to 92—and 10% will make it all the way to 96. And this is according to the Social Security agency's own data.
MARK: So let's set aside life expectancy for a minute. Are there strategies to consider that help a couple maximize the benefits for both of them?
ROB: So we each get our own Social Security benefit. But it's important to remember Social Security really isn't just an individual decision. If you have a spouse who's also covered by Social Security, there are lots of strategies you can explore to help maximize the benefits for you both
So, for example, a lower earning spouse can file early—say, at age 62 or up to their full retirement age—and then receive their own benefit. The higher earner might wait to file up to age 70, and the lower earner starts to receive those reduced benefits. But by waiting, the higher earner gets that larger benefit.
MARK: So what happens when one spouse passes away?
ROB: This is one of the most important insurance features in Social Security. So the surviving spouse is entitled to a survivor benefit, which is equal to the full amount their spouse was getting.
So if the lower earner is the survival, that bump up to the survivor benefit can be significant. So if you're the higher earning spouse, the survivor benefits are reason enough, we think, to consider waiting if you can. The longer you wait, the higher the survivor benefit for your spouse.
MARK: Is there an age by which you absolutely should be taking Social Security no matter what?
ROB: The maximum age is age 70—so there's no reason to wait. I suppose you could, but there's no reason that I can imagine where you wouldn't claim your benefits at, at least, age 70.
MARK: All right, so we've got the end points settled. Definitely start taking it at age 70. If possible, avoid taking it at 62. And we've laid out the conditions where filing that early would make sense—if you're in poor health, if you have a higher earning spouse who can delay filing, or if you simply need the benefit as soon as possible to cover your living expenses.
But now let's talk a little bit about what are some steps for people to figure out where they should land between those two extremes at 62 and 70?
ROB: Here are three points to consider—and the first is are you or your spouse, if you're married, in average or good health? If you are, there's a really good chance you're going to live longer than average, and the benefits of waiting for a higher benefit can pay off significantly later in retirement.
As we discussed, it can be really difficult to keep an eye on our future selves when today is right in front of us. But the three biggest risks in retirement are living longer than expected, not having saved enough, and experiencing market risk in your portfolio. Social Security is really handy because it can help with each of those risks.
Well, that brings me to the second point, which is can you afford to wait? If you can, we suggest don't anchor to the age 62, because you've heard that someone that you know retired at 62 or worry that you'll regret not taking the money now.
Aim for at least full retirement age if you can—between age 66 and 67, depending on your date of birth—and work, save, plan accordingly. You may choose or even be forced to retire early.
But consider—are there other ways you can work to save or make it easier to wait until your full retirement age? And look at those options and plan ahead for the alternatives.
MARK: So, Rob, you use the term full retirement age. That's not a term we hear often. I'm guessing it has a specific meaning within the context of Social Security.
ROB: Right, full retirement age is just that age we talked about where you're first eligible to receive your full or unreduced retirement Social Security benefit. So it's that age that Social Security bases your benefit on. And if you retire earlier than that, your benefit is reduced. And if you retire later than that—up to age 70—you get a credit and your benefit is increased.
MARK: So your first point was about longevity. Your second point was to wait as long as possible before you start claiming. What's the third point?
ROB: Well, a third point is to think about Social Security not just in isolation. Retirement has a lot of moving pieces in it. It can seem very complex, but think about how your savings fit in with Social Security and a coordinated retirement plan.
Retirement, for most people, is going to have several parts. Social Security is only one. So work with a financial planner and consider Social Security and when to take it within the context of the rest of your personal retirement plan.
MARK: Well thanks, Rob. We appreciate you coming by to decode some of the complexity of the Social Security system.
ROB: Thanks, Mark.
MARK: Before we continue, I want to take a moment to encourage listeners to reach out to me on X, formerly known as Twitter, through my handle @MarkRiepe, M-A-R-K-R-I-E-P-E. You can send me your thoughts on the show, suggestions on what you'd like to learn about in the future, or just put an interesting study on my radar.
Also, for those listening on Spotify, you can submit a comment on specific episodes in the app, so consider submitting follow-up questions to episode topics that left you wanting a little bit more.
I'll put links to both platforms in the show notes. Thanks, and enjoy the second half of the episode.
If you're a regular listener of the podcast, you know that our stock-in-trade here at Financial Decoder is psychological biases. And—no surprise—there are biases around Social Security.
One study I found interesting looked at the effect of how the date for starting benefits can be shaped by how the decision is framed.[4]
The study tested 10 different ways to describe how the benefits for an individual would change if the age at which benefits were first received were to be altered.
One method was called the break-even analysis.
For this method, a person is told that if they delay benefits from age 62 to age 64, they will receive bigger payments each month, but they would lose the payments that they would have received during the two years they delayed receiving payments.
The individuals were then told how long they would have to live to make up the difference (in other words, how long they would need to live to break even).
Another frame was called the gain-versus-loss frame.
In this frame, individuals were told that if they took benefits, for example, at age 62, they would get a particular payment, and they would lose the higher payments that they could have had if they deferred starting benefits.
On the other hand, they would gain payments if they waited until the higher age to start.
Like I said, there were 10 frames presented, and in all these frames, the decision being presented is the same. In other words, when do I start to take Social Security? But each frame kind of spun the decision differently and emphasized different consequences.
What makes this study so interesting is that the break-even frame caused people to prefer taking Social Security about a full year earlier than other frames, which emphasized losing higher payments by claiming benefits earlier.
If you have some examples of how you framed the Social Security claiming decision for yourself or for others who've asked your advice, I'd love to hear from you.
Post your experiences on my LinkedIn page or send me a message via X.
For now though, there have been many other studies done about Social Security and how to think about it.
And I want to explore those with Susan Hirshman. She'll provide some ideas on how to identify and circumvent biases in real life.
She's a director of wealth management for Schwab Wealth Advisory and the Schwab Center for Financial Research and has worked for many years as an advisor to high-net-worth and ultra-high-net-worth investors.
MARK: So Susan Hirshman, welcome back to the show.
SUSAN HIRSHMAN: Thanks, Mark. So glad to be here again.
MARK: Hey, I wanted to talk a little bit about some of the decision-making biases that affect us when we're deciding what to do regarding Social Security. Obviously, a big decision for people. And one of the biases is caused by this concept of the FRA—or the full retirement age—and the biases that people really get overly fixated on that age.
Many people, you know, they kind of anchor to it and feel that that's the age when they should retire. And of course, other people sometimes anchor on age 62, which is the date that they can first take benefits.
So in your experience, what's the typical retiree's understanding of the FRA? Are there any misconceptions that you've come across that cause retirees to anchor their timeline to this number that, let's face it, they didn't actually choose. It was kind of created through legislation.
SUSAN: Yeah, I think FRA—just the name itself, full retirement age—really plays with people's minds, and it makes them think that that is the age that is when they can start taking Social Security. I think it's really important to note, as you said—the FRA is your baseline. If you take it prior to your FRA, then you get less than that baseline amount. If you take it after, you get more than your baseline amount.
And so why do we get less? Why do we get more? It's because what people don't realize—and I think this is where the misconception comes into play—is that the Social Security Administration, they want to pay you the same total amount over your expected life expectancy.
The game really comes into play when you believe that your life expectancy is either less or greater than the expected. But really for most people, accurately pinpointing what one's life expectancy will be, it tends to be, shall we say a little bit imperfect.
MARK: It certainly is.
Maybe another anchoring point that people use is using the age where they see their friends retiring or other family members—for example, their siblings—retiring. Do you see that serving as a reference point for people, and what do you think about that? Is that a good idea, bad idea?
What are your thoughts?
SUSAN: Yeah, and it's definitely one of the most prevalent things that we see in terms of what the influences on retirement age are. And really, the bottom line is not everybody's situation is the same. And so you have to really take a look at who are you, what do you have, what do you want, what's your plan, and how does that all fit into your work history, your savings, and what you're going to spend during retirement? So it's all about the plan.
MARK: Another bias that we see is framing, and the issue is that the way you frame a problem can influence how you'll make decisions about it.
And framing is especially important when it comes to Social Security because if you look at it as a decision that you're making just for yourself—in other words, it's a very narrow frame just zoomed in on yourself—you may come up with a different decision than if you're making one on behalf you and your spouse.
So tell us a little bit about how to make that joint decision.
SUSAN: One of my favorite expressions when talking about Social Security is that, if you're married, and if you have a big difference in your wage history or wage earnings, then Social Security is a team sport.
It's not an individual decision. And the reason that we say that is because what you do as the higher-income spouse can have a big effect on the spousal benefits and the survivor benefits.
And what you do today can lessen the benefit to your family as a whole, whereas if you think about what is right for the family as a whole versus just you, you may benefit everybody more impactfully.
MARK: So maybe explain that a little bit. Like, if I'm just optimizing for myself, what does that look like versus if I'm optimizing for us as a couple?
SUSAN: Some of the calculators that are online are only optimized for yourself. And that's one thing you should be aware of when looking at those calculators. Because when you're optimizing for a couple, you have to think about survivor benefits.
So most people, when they're looking at a couple situation, if they want to maximize the amount that the survivor will get, they try and maximize their monthly benefit by waiting as long as possible—until age 70, for example.
MARK: And sometimes I've heard you contrast survivor benefits with spousal benefits. So what's the difference between the two?
SUSAN: Yeah, it's really interesting, and it gets very confusing. And so spousal benefits, think alive—where survivor benefits, think death, so to speak.
So spousal benefits are for couples who, again, have that uneven work history or earnings history where the lower-income spouse, the benefit that they would receive on their own record, on their own work history, is lower than what they would receive if they got a spousal benefit based on that higher-income spouse's benefit.
I know it sounds a lot of mumbo jumbo. And there's a lot of words and definitions here, and it can get really overwhelming. And so there are resources for you to go back to to help you understand what your Social Security and what these definitions are all about.
MARK: Yeah, we'll get back to those in a second. Before we get there, though, I had a couple of other topics I wanted to cover with you.
One is this idea of present bias, which we've talked about on the show before. It's where you're essentially paying too much attention to the near term and not enough to the longer term. So how does that impact the decision of when to claim Social Security?
SUSAN: Yeah, and I think we just—in essence, to a point—explained it because going back again to the spousal and the survivor benefit. You know, if you're single, right, you can take it as early as possible. Especially single people tend to take it earlier if they think that their life expectancy is shorter.
But if you're, again, married and have big disparities in the earnings history, you have to be cognizant of that spousal and that survivor benefit. So you as the high earner may just want to take as much money as possible as early as possible, but understand that has repercussions for your survivors.
MARK: Yeah, and think it also, even for the single person, it has repercussions for them. I mean, if you're taking it as soon as you are eligible—say, age 62—you start taking it, you're stuck with that basically for a really long time.
Whereas each month you wait, you're actually going to end up getting a bigger check. But the allure of getting that check right away is really, I think, very attractive to some people.
SUSAN: Yeah, it really all comes down to life expectancy expectancy. And so it's for people—maybe you have a chronic illness, or you just got a bad diagnosis, and you really are confident that you're going to have a shorter life expectancy than stated, then you may want to consider that.
MARK: Yeah, and of course, some people, you know, they sort of need the money. You know, they've looked at kind of their expenses and their other sources of income. And it's just going to make more sense for them to take it right then, which is, you know, perfectly fine as well.
SUSAN: Definitely.
MARK: Of course, another reason that some people take it early is because they don't think Social Security will be there for them if they take it later. So that's sort of almost like a loss-aversion type mentality. So what are your thoughts about that?
SUSAN: Yeah, and I think there's some confusion about will Social Security be bankrupt or not. And a lot of it arises from the fact that there's a lot of Baby Boomers out there, and a lot of those Baby Boomers have retired. And so right now, there's a lot more people taking from the pot, so to speak, than paying taxes back into the pot.
In fact, it's estimated that after 2030, instead of 3.3 workers per beneficiary, it's going to decrease to two workers per beneficiary. And what happens then? That decrease in the number of workers per beneficiary, what it does, it results in the accumulated funds in Social Security to be used up by 2037. That's what people are saying in terms of the bankruptcy, but they're not taking into consideration that at that point, there's still a lot of people paying taxes into the system.
And those taxes are expected to be enough to pay 76% of the scheduled benefits. So the bottom line is that it's not bankrupt, right? And there are fixes. In fact, the Social Security Board of Trustees projects that just changing the current tax rate from 12.4% to 14.4% will be sufficient to allow full payment of the scheduled benefits for the next 75 years. But as we know, it's not necessarily their call, and we have to see how the political environment evolves over the next several years.
MARK: So last question for you, Susan. And clearly, this is a very personal decision. And a lot of it depends on—as you were talking about—your ages, your marital status, your earnings history, other things going on in your life.
So what are the tools that are available for people to get a sense as to what their options are, and which ones may be more or less attractive?
SUSAN: Believe it or not, this is one time where I am going to brag a little about the government resources. And I really do think that the Social Security Administration does an excellent job of giving you tools, resources, information, definitions.
There's so much on that site that can be really helpful. So if you are thinking about your Social Security—which should be done before you retire—take some time and look through the site. Get an understanding of what your benefits would be.
They share with you what they would be at 62, at 65, at 67, at 70, etc. And they help give you information about survivor benefits and the like. So really take some time, as well as Schwab.com always has some great articles on Social Security.
Soon I'll also be doing an episode on WashingtonWise with Mike Townsend, and there we're going to really go into detail about more misconceptions and mistakes that people are making with Social Security.
MARK: That will be fantastic. I will certainly make time to listen to that as everyone should. Mike's got a great podcast, so everybody should pay attention to that.
Susan Hirschman, director of wealth management for Schwab Wealth Advisory and the Schwab Center for Financial Research. Susan, thanks for being here today.
SUSAN: Thank you, Mark. Always love being here.
MARK: That's it for today's episode.
If you'd like to hear more about what's going on with Social Security in Washington, be sure to follow our sister podcast WashingtonWise, hosted by Mike Townsend.
It's always interesting to hear Mike's take on financial topics as he looks at them through a governmental lens. As you heard Susan mention, the two of them will be going into more depth about Social Security from a policy perspective, so subscribe to WashingtonWise to make sure you don't miss that.
If you'd like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe, M-A-R-K R-I-E-P-E. And if you like the show, a rating or review on Apple Podcasts would be much appreciated.
We always like new listeners, and if you know someone who might like the show, please tell them about it and how they can follow us for free in their favorite podcasting app.
For important disclosures, see the show notes and schwab.com/FinancialDecoder.
[1] Caplan, Zoe, "U.S. Older Population Grew From 2010 to 2020 at Fastest Rate Since 1880 to 1890," Census.gov, May 25, 2023, https://www.census.gov/library/stories/2023/05/2020-census-united-states-older-population-grew.html
[2] DeWitt, Larry, "The Development of Social Security in America," Social Security Bulletin, Vol. 70, November 3, 2010, http://www.socialsecurity.gov/policy
[3] Historical Statistics of the United States: Colonial Times to 1957, series B 76-91, p. 24; and series B 92-100, p. 25.
[4] Jeffrey R. Brown, Arie Kapteyn, and Olivia S. Mitchell, "Framing and Claiming: How Information-Framing Affects Expected Social Security Claiming Behavior," Journal of Risk and Insurance, March 2016.
