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Coronavirus Increases the Risk of These 2 Huge Social Security Mistakes

By Christy Bieber – Jul 31, 2020 at 10:00AM

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Are you in danger of making them?

Social Security benefits account for around one-third of the income that elderly Americans receive. Unfortunately, many retirees get less money than they should from these important benefits because they made the wrong choice about when to start getting their monthly checks. Due to the coronavirus pandemic, the chances of that happening have actually gone up for future retirees.

That's because this 2020 recession increases the chance of two big mistakes that could shrink many retirees' Social Security benefits. 

Binder labeled retirement savings plan.

Image source: Getty Images.

1. Retiring with less than 35 years of work history

Coronavirus has led to record-high unemployment. As a growing number of states are forced to roll back reopening plans, the chances of a fast recovery are quickly fading away. Unfortunately, that means millions of Americans may be facing prolonged unemployment. For example, some parents have been left without child care because schools will be offering remote learning and they may not even be able to begin looking for work again while the kids are stuck at home. 

This issue and others create a big problem for workers not just now, but also when it comes to calculating future Social Security benefits. That's because the size of benefit checks is based, in large part, on workers' average wages over their 35 highest-earning years. If unemployed for a prolonged period or unable to return to work because there's no one to watch the kids, a worker may not be able to get in that full 35 years of employment history. That has the definite potential to reduce Social Security benefits because the government is unlikely to account for this recession and adjust its formula. The Social Security Administration will use that lower yearly salary figure as part of its calculations. And if being out of work means you only work 32 years, for example, there will be three years of $0 salaries added to the formula calculations. Your overall benefit will shrink substantially because if that happens. 

You can avoid this, though, by simply working longer toward the end of your career once you've found a new job again. If you were planning to retire at 62 and have just 33 years of work in by that time, you could opt to keep your position until age 64 to get your full 35 years. Working for an extra few years could also pay off if COVID-19 lowers your wages this year and next year, and you want to replace those two low-earning years in the calculation of your average wages with higher ones later in life. 

2. Claiming benefits early

When the country is in a recession, more people tend to claim Social Security benefits early. That makes some sense because older workers who are laid off may struggle to find work or may simply not want to start over in a new job or profession. They end up opting to claim Social Security instead. Some older workers may also consider opting for retirement because they don't want to work during a health pandemic involving a virus that appears to be especially dangerous for the elderly. 

Unfortunately, if you claim benefits early, you could be hit with early-filing penalties if you're under the age designated by law as your full retirement age (FRA). And even if you've already reached FRA, you could still shrink the size of your checks by claiming them earlier than planned if doing so means giving up the delayed retirement credits available until you turn 70. The cost of early claiming can be huge, with married couples missing out on as much as $500,000 in lifetime Social Security income if they claim at age 62 instead of age 70. 

To avoid a big loss of overall benefits that can result if you start them early, consider relying on unemployment or other income sources and delaying the start of your benefits as long as you can. And while you may decide this doesn't make financial sense for you, and you simply want to start your Social Security benefits, don't make that decision without first fully assessing how this could affect your monthly and lifetime income.

Don't make these Social Security claiming mistakes

In some cases, you may decide that you want to start your benefits when you don't have a full 35 years of work history. Or you may prefer to get checks at a younger age, even if that means your benefit amount is smaller. And there's nothing wrong with these choices, as long as they're informed choices.

The problem comes when you don't understand the consequences of your decisions and you react too quickly during a time of financial crisis. While COVID-19 and the 2020 recession are undeniably causing substantial stress for millions of Americans, you don't want to let your short-term situation impact your retirement security in the long term.

So before you claim your Social Security benefits now during this time of crisis, take the time to think about whether your choice is a decision you'll be happy with for the rest of your retirement. If it is, you can move forward as planned. But if not, you may want to consider other alternatives first. 

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