Americans have 'incredible' misconceptions about Social Security

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Rep. David Schweikert (R-Ariz.) on the report that Social Security will run out of money by 2035 and that Medicare will become insolvent by 2026.

Older Americans – including current and future retirees – appear to have a meaningful lack of knowledge about Social Security and how it can boost their retirement income streams, according to a new report from the Nationwide Retirement Institute.

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“What’s a little disappointing is that there continues to be an incredible number of misconceptions about Social Security,” Tina Ambrozy, president of financial distribution at Nationwide, told FOX Business. “The report showed that people really don’t understand the way Social Security works … [down to] even understanding what your income would be.”

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People tend to grossly overestimate the size of their Social Security checks, the results showed. Future retirees expect to receive $1,805 in monthly benefits – but yet retirees currently collecting receive $1,408, on average – a 28 percent difference.

Ambrozy said that disconnect is “alarming,” but findings also reveal that some people believe if you begin collecting at age 62, your check will actually increase when you reach age 65. In fact, the reduction of benefits for those who claim at 62 is 25 percent, 20 percent for those that claim at 63, 13.3 percent at age 64 and 6.7 percent at 65.

The average age current retirees started collecting was 62. However, delaying when you collect, when possible, can actually increase a worker’s benefit by as much as 32 percent.

Meanwhile, about 25 percent of people think they can live on Social Security alone – even though the program was designed to be supplemental, not the primary form of retirement income.

As previously reported by FOX Business, the annual trustees report forecast that Social Security will not be able to pay full benefits by 2035, at which time trustees predict the program’s reserve funds will be depleted. At that time, only 80 percent of the benefits will be payable.

Only 8 percent of people were able to identify the factors that determine the maximum benefit an individual can receive – including work history, age, benefits start date and marital status.

The lack of knowledge – and planning – has barely changed in the six years Nationwide has been conducting the survey, Ambrozy noted.

While a little less than half of people said they were confident or very confident in their Social Security knowledge, when asked specific questions, people didn’t always know the answers.

Only 30 percent of people know that if they don’t work for at least 35 years, their benefit will be reduced. Only a slightly higher percentage of people knew that someone earning $150,000 pays as much in Social Security taxes as a millionaire. Less than half of respondents knew Social Security is protected against inflation, while about one-third of people thought benefits are tax-free.

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Working with a financial adviser, however, has proven to help. According to the survey, those who worked with an expert saw 15 percent greater lifetime income benefits – $1,551 versus $1,324.

The survey was conducted online Feb. 11-21 among more than 1,300 people, including pre-retirees (ages 50-plus), recent retirees and people who have been retired for at least 10 years.