Uncertain About Social Security's Future, Many Opt for Early Benefits

A USA Today last week caught my eye: "Why Americans Plan to Take Social Security Earlier, and Even Leave Retirement Money Behind." Any person who has paid into Social Security and has sufficient credits can apply for retirement benefits as early as age 62 (even earlier in some cases). But waiting to apply at a later age means a significantly larger monthly benefit — 45% larger if one waits until "normal retirement age" (about age 67) and 77% larger if waiting until age 70.

But most Americans don't intend to wait.

A new survey from Schroders (Schroder Investment Management) found that roughly 90% of not-yet-retired Americans say they will claim benefits before age 70. About 40% won't even wait until their normal retirement age.

It's not because they don't understand that waiting translates into a higher monthly benefit. They do, but are choosing to file early anyway. "The choice to forgo larger Social Security payments is a deliberate one," according to Schroders. "72% of non-retired investors — and 95% of non-retired ages 60-65 — are aware that waiting longer earns higher payments."

The concern that's prompting a "sizeable number" of them to claim early — more than four respondents out of 10 — is that they're uneasy about Social Security's financial soundness and want to receive as much money as possible before benefits are altered.

From USA Today: Forty-four percent [of respondents to the survey] said they were concerned that Social Security may run out of money and stop making payments.... [The] Social Security [trust fund] is expected to be depleted in 2033, a year earlier than prior forecasts, the Congressional Budget Office said in June. "We have a crisis of confidence in the Social Security system and it’s costing American workers real money," said Deb Boyden, Schroders head of U.S. defined contribution. "Fear about the stability of Social Security has people walking away from money that could improve their quality of life in retirement. Many are not even waiting for their full benefit [at normal retirement age] let alone the maximum, which means they will have to create more income on their own, making it even more important to save and invest earlier for retirement." It's essential to clarify a point here. The idea that Social Security "may run out of money and stop making payments" — the survey's wording, quoted in the USA Today story — is not credible. Whatever may happen with Social Security in 2033, the system will not run out of money or stop making payments. Social Security will continue to take in more than $1 trillion in taxes yearly and pay out more than $1 trillion in benefits. As explained in SMI's May issue, the problem is that annual tax revenues are *no longer sufficient to pay all the benefits that have been promised. *For the next 10 years, Social Security's "trust-fund reserves" (hundreds of billions in Treasury Department bonds) will be redeemed to make up the funding shortfall. But by 2033, those reserves will be depleted.

By law, the Social Security Administration can't pay out more in benefits than it receives in tax and bond revenue. So when the current bond reserves run dry, Social Security must reduce benefits or raise revenue — or some combination thereof.

"Fear" or rational concern? Schroders and USA Today suggest that "fear" motivates those who claim early because of concerns about Social Security's financial health. Perhaps. But it could be that early claimers are making a rational choice. In a report (PDF) issued earlier this year, the Office of the Chief Actuary of the Social Security Administration laid out a series of proposals that could be implemented to close Social Security's massive long-term funding gap. They include:

• Changing the formula for calculating benefits (which would have the effect of reducing benefits)
• An increase in the tax on retiree benefits (essentially the same as a benefit reduction)
• Modifying the annual Cost-of-Living Adjustment (COLA) (meaning the annual inflation adjustment would be less generous)
• More means-testing (perhaps meaning a reduction in benefits for people of greater wealth)
• Raising the retirement age
• An increase in tax rates for both workers and employers

Making a prudential judgment

I plan to wait until age 70 to claim because when Congress finally does something about Social Security, it isn't likely to cut benefits for those in (or nearing) retirement. Older people tend to vote in large numbers, and no member of Congress wants to alienate likely voters by reducing their monthly income. At least, I don't think so.

Yet, I sympathize with those who are wary about how Social Security's shortfall situation might play out. Undoubtedly, many near-retirees are deciding to claim early based on reasonable caution, not irrational fear.

What do you think?

If you're nearing retirement in the next few years, what's your plan? Claim Social Security benefits at 62? Wait until "normal retirement age" (also known as "full retirement age")? Hold on until 70? Or are you still wrestling with this decision?

*Image used with permission. *