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March 2011

A periodic report on activities of the Financial Literacy Center

Deepening the Public's Understanding of Social Security

people discussing retirement

Social Security benefits provide more than half the income of older Americans and nearly the entire income for one-third of beneficiaries. Yet most people have little understanding of this important source of financial security in their later years. New research from the Financial Literacy Center (FLC), a consortium of the RAND Corporation, Dartmouth College, and the Wharton School with support from the Social Security Administration (SSA), documents different aspects of this problem.

Establishing a Benchmark

One FLC project sought to "benchmark" public understanding of the rules and benefits offerings under Social Security, so that the SSA can measure the effects of its initiatives to improve financial literacy.

Researchers relied on two nationally representative surveys, one conducted by Matthew Greenwald and Associates, and the second, RAND's American Life Panel (ALP), to find out how respondents are preparing for retirement, how well they understand how Social Security works, what kind of protection they expect from the Social Security system, and how they perceive SSA's role in educating the public.

The surveys showed that:

  • Most people give themselves very poor marks in preparing for retirement.
  • Most respondents do not understand the basic features of Social Security benefits, such as how they are calculated, whether they are taxable, whether they are adjusted for inflation, or whether surviving family members can receive benefits.
  • Most respondents look to the SSA in helping inform them about these issues and helping them prepare for retirement.

arrowRead More: How Much Do People Know about Social Security?

A Clear Statement?

Workers 25 years or older receive a statement every year that estimates their anticipated future retirement benefits from Social Security. What is not yet known is how people use the statement to understand future benefits. In another study, analysts examined whether popular understanding of Social Security has improved since these statements were first mailed out in 1995.

To address this question, a second FLC project compared how accurately people could estimate their future benefits prior to, and after, the SSA started mailing out the statements to covered workers. They used benefit estimates reported in the Health and Retirement Study (HRS) in 1992, before the statements began to be mailed, and afterwards.

Somewhat unexpectedly, the statement appears not to have helped workers estimate their future Social Security benefits more accurately. This may be because people have difficulty recalling numbers. Alternatively, workers may misinterpret the benefit statement as applying to their entire household, rather than to themselves.

arrowRead More: Does the Social Security Statement Improve Americans' Knowledge of Their Retirement Benefits?

Framing the Question

a couple stressed about finances

Social Security retirement benefits can be claimed as early as age 62 by eligible workers, but monthly benefits are larger if people claim at older ages. For example, someone who stopped working at 62 but then waited to claim until age 70 would receive a monthly benefit 76 percent higher for life, compared to claiming benefits at age 62.

It turns out that how this this choice is explained has a powerful impact on when people claim their benefits. Using the ALP, an FLC research team experimented with different ways of "framing" the claiming information, while keeping the basic factual information exactly the same.

Results confirm that how information is framed strongly shapes respondents' expected claiming ages. For example, presenting the claiming choice in terms of gains ("Delaying claiming for one year will increase your benefit by $x") tends to induce later claiming. By contrast, presenting the claiming choice as benefits forfeited in a breakeven analysis ("You will come out ahead only if you live 14 more years") prompts people to claim more than one full year earlier. Moreover, the least financially sophisticated respondents—particularly women and the least educated—were the most susceptible to how the information was formulated.

This work has implications for the SSA and private financial advisors about how to inform the public when making this critical claiming age decision.

arrowRead More: Is Social Security Claiming Influenced by How Information Is Framed?

Moving Forward

Building on this research, the FLC continues to explore other areas in ongoing studies including examining how financial advisors influence Social Security claiming and how people perceive annuities versus lump-sum payments when it comes to benefits.

arrowRead More about the Financial Literacy Center

arrowRead More about RAND'S American Life Panel

Financial Literacy Research Consortium Annual Conference

Arie Kapteyn

The Financial Literacy Research Consortium (FLRC) has supported more than 40 projects nationally in the last two years alone. This work was showcased at the conference in November 2010, which brought together nearly 400 leaders in the financial literacy field for the largest event of its kind.

arrowView Video Presentations

About the Financial Literacy Center

The mission of the Financial Literacy Center is to develop and test innovative programs to improve financial literacy and promote informed financial decisionmaking.

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Contact Information

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Phone: (603) 646-2202

This newsletter of the Financial Literacy Center is administered by the RAND Corporation, a managing copartner of the FLC, along with Dartmouth College and the Wharton School. RAND is located at 1776 Main Street, Santa Monica, CA 90401-3208. RAND(r) is a registered trademark.

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