According to the May update from the Social Security Administration (SSA), the program is paying out a monthly benefits check to nearly 61.5 million people, 68% of which are retired workers. Without this monthly income, millions of seniors would likely be struggling to make ends meet during their golden years.
Given current retirees' heavy dependence on Social Security income, as well as the poor savings rates of workers who will retire in the years ahead, it only makes sense that today's workers focus on the three factors they can control to boost their lifetime payout.
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Three ways you control your Social Security benefit
Two of these factors are interconnected: your work and earnings history. The SSA averages the income of your 35 highest-earning years when calculating your benefit at full retirement age. Essentially, this means you should not only aim to earn as much as you can each and every year, but also work at least 35 years, if not longer. For each year less of 35 worked, the SSA averages in a $0, which will drag down your eventual Social Security payout.
The third factor under your control, which may arguably be the most important factor, is when you decide to claim benefits. Social Security benefits can begin as early as age 62 or at any point thereafter, but there's a substantial incentive to wait. For each year that you hold off on enrolling for benefits, beginning at 62 and ending at age 70, your eventual payout increases by approximately 8%. Depending on your full retirement age -- the age at which the SSA deems you eligible to receive 100% of your monthly payout -- you could see a permanent reduction in benefits of up to 25%-30% by claiming at age 62, or you could enjoy a 24%-32% raise by waiting until age 70.
Again, considering how reliant seniors have become on Social Security, you'd think many Americans would be waiting until age 70 in order to maximize their monthly paycheck. But in reality, according to data tallied by the Center for Retirement Research at Boston College in 2013, just three out of 100 seniors wait until age 70 to claim Social Security. Comparatively, nearly half (45%) claim benefits at age 62, permanently reducing their payout by 25% to 30%.
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Here's why so few seniors wait until age 70 to claim Social Security
Why aren't more seniors waiting until age 70 and maximizing their Social Security benefit? Here are seven likely reasons.
1. The expectation of a cut to future benefits
One real possibility why 90% of seniors sign up between age 62 and age 66 is the fear that benefits will soon be cut -- or that the program will even go bankrupt.
Social Security won't go bankrupt, because it is funded by the payroll tax levied against working Americans. However, the Social Security Board of Trustees says the Trust's $2.85 trillion in asset reserves is expected to be completely exhausted by 2034, at which point an across-the-board benefits cut of up to 21% may be needed to extend the solvency of Social Security through 2090. Congress still has time to implement changes that prevent or mitigate such a drastic benefit cut, but nonetheless, the uncertainty may be prompting seniors to claim earlier in an effort to cut their potential losses.
2. Debt issues
Another likely answer is debt, which is an issue that's plaguing seniors in greater numbers these days. For instance, data from the Consumer Financial Protection Bureau showed that the percentage of homeowners aged 65 and up carrying mortgage debt grew to 30% in 2011 from 22% in 2001. For those aged 75 and up, it more than doubled to 21.2% from 8.4% over that same time frame.
Seniors also tend to have a significant amount of credit card debt. Data from ValuePenguin revealed that seniors aged 65 to 69 have an average of nearly $6,900 in credit card debt. How will these debts get paid? Some seniors are turning to Social Security for their solution. By claiming early and getting an immediate boost in their take-home pay, they're hoping to reduce or eliminate their debt.
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3. Poor health
Life expectancies have been pretty steadily climbing for decades, but that doesn't mean everyone is living to the average age of nearly 79 years, according to the Centers for Disease Control and Prevention. No one knows their expiration date with any certainty, but we do have a pretty good bead on our personal health, and often that of our immediate relatives. If you're in poor health or you're living with a chronic health condition that could prove life-threatening, it may not make sense to wait to claim Social Security benefits. An earlier filing may be the smarter move in this instance, since it'll give you the best chance of maximizing your lifetime payout.
4. Being a lower-income spouse
The lower-income spouse among married couples is also very unlikely to wait until age 70 to claim his or her benefits. It makes far more sense to let the benefit for the higher-income spouse grow at 8% each year than it does to let a lower benefit grow until age 70. Instead, lower-income spouses often wind up taking their benefits early in order to generate some income for the couple until the higher-income spouse files for their benefits at full retirement age or later.
5. Inability to find work
Another reason seniors aren't choosing to wait until age 70 to claim Social Security is because they're struggling to find sufficient monthly income in their 60s. The good news here is that, according to the Bureau of Labor Statistics, the senior unemployment rate is pretty low. However, that doesn't necessarily mean seniors' pay is commensurate with their skill level. And when seniors are out of the workforce, they tend to struggle mightily to get back in. Some just plain give up and wind up claiming Social Security benefits early in order to generate some monthly income.
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6. Zero reliance on Social Security income
For those persons who aren't reliant on Social Security income, such as the wealthy, there's often no purpose in waiting to claim benefits. The wealthy can use their Social Security checks as "fun money" to pay for vacations or other passions while they're still young enough to enjoy them to the fullest.
7. Don't know any better
Finally, some seniors may file for benefits early simply because they don't understand the ramifications of doing so.
Back in 2015, more than 1,500 Americans took MassMutual's 10-question true-or-false quiz on basic Social Security concepts, and a meager 28% received a passing grade of at least seven out of 10 correct. In fact, just one person managed to answer all 10 questions correctly. If you don't understand how Social Security payouts work, or what your options are, you could easily make a bad choice and wind up leaving thousands, or tens of thousands, of dollars on the table over your lifetime.
My guess is that as knowledge surrounding Social Security improves, we'll see an increase in claimants at age 70. Until that time, though, expect a majority of seniors to continue to accept a permanent monthly reduction in their benefits check by claiming before their full retirement age.
