How Social Security subconsciously affects retirement planning

Does the language that Social Security uses encourage poor retirement planning decisions? Behavioral finance research shows that the words used to describe benefits can significantly influence decisions, even if this influence is unintentional. Scientists call this phenomenon "framing."

Many retirement analysts and writers -- me included -- advocate delaying Social Security benefits as a means to increase lifetime retirement income and retirement security. Let's see how Social Security's descriptive terms may unintentionally encourage people to claim Social Security early, reducing their retirement security in the process, and how different terms might result in more effective decisions. To understand these ideas, first we need a little background on how Social Security calculates your retirement income.

A complex set of rules define how the retirement income is determined at your "Full Retirement Age" (FRA), also called your "Normal Retirement Age" (NRA). FRA is age 66 for current retirees, but it increases to age 67 for younger people. Your Social Security income is reduced for each month that you start benefits before your FRA, and the earliest possible age you can start benefits is age 62, resulting in the smallest income. Your income is increased by a "delayed retirement credit" for each month that you start benefits after your FRA, but there's no further increase for starting benefits beyond age 70.

The term "full retirement age" is very misleading, since your benefits will be increased if you start your Social Security income after your FRA. In reality, age 70 should be called your full retirement age, not age 66, because starting your income at age 70 produces the largest monthly income. The term "normal retirement age" also sends a message that it is normal to start benefits at that age, but you'd receive a smaller monthly income if you start at age 66 instead of age 70.

If you start your Social Security income before your FRA, as far as Social Security is concerned you've retired "early." In our society, the term "early" has positive associations (the "early bird gets the worm," for example). If you start your Social Security benefits early, that could imply that you're successful and have figured out how to retire early. But the reality is that you're receiving a smaller retirement income if you start your benefits before age 70 or even age 66. When it comes to retirement income, size matters!

If you start your benefits after your FRA, you've retired "late" and you receive a "delayed retirement credit." The words "late" and "delayed" often have negative associations, suggesting a failure to complete a task on time. But the reality is that delaying the start date of your Social Security income produces a larger retirement income. So it's not really a failure to delay retirement -- with your retirement paycheck, bigger is better!

Let's look at some alternative terms that we could use to describe Social Security benefits that more accurately describe the calculation process. These words may also result in more effective framing to influence the decision when you start your Social Security benefits.

If you start benefits before your FRA, you'll receive "reduced retirement benefits," and you've started benefits at a "reduced retirement age." If you start your income at age 62, you'll receive the "fully reduced benefit" or the "smallest retirement income." Nobody likes to have their benefits reduced or wants to receive the smallest retirement income, but that's actually what happens when you start your benefits well before your FRA.

Instead of calling age 66 the "full retirement age" or "normal retirement age," think of that as the age when you receive an "unreduced benefit," and age 66 is your "unreduced retirement age." These terms are neutral, and hopefully wouldn't influence claiming behavior one way or the other.

If you start your benefits after age 66, then you'll receive "increased retirement benefits." Everybody likes increased benefits! Your retirement age could be called your "increased retirement age." If you wait until age 70 to start your benefits, you'll receive "maximum retirement benefits" at your "maximum retirement age." Hopefully this term will encourage people to "take it to the max!"

I don't expect Social Security to change the words they use to describe benefits any time soon. But you don't need to wait if you want to make more effective retirement planning decisions. You can use framing to your advantage -- just start thinking about your Social Security benefits using the words in this post.

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    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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