Social Security is arguably the most important social program in this country. While taking nothing away from Medicare, Social Security provides a guaranteed monthly payout to over 62 million eligible beneficiaries each month, 42.8 million of which are retired workers. The mere fact that Social Security exists keeps an estimated 15.1 million retirees out of poverty, according to an analysis from the Center on Budget and Policy Priorities.
But, Social Security is also far from perfect. An annual report from the Social Security Board of Trustees released last summer estimates that the program will begin paying out more in benefits than it's generating in revenue by 2022. A dozen years later, in 2034, the Trust's roughly $3 trillion in asset reserves are expected to be completely exhausted. Should Congress fail to generate additional revenue for the program, the Trustees report projects the need for an up to 23% across-the-board cut in current and future retiree benefits.
While this probably sounds scary, it pales in comparison to one particular answer from the recently released Retirement Confidence Survey from the Employee Benefit Research Institute (EBRI).
Today's working Americans appear to be making some smart Social Security moves
EBRI, in partnership with independent research firm Greenwald & Associates, surveyed over 2,000 Americans -- 1,002 working-age Americans aged 25 and over, and 1,040 retirees -- in January to gauge their confidence level and preparedness toward, and in, retirement. With Social Security playing such a key role in supporting seniors in some way during retirement, confidence in the program and claiming strategies are important issues that are delved into during this annual survey.
Some of the answers were quite encouraging. For example, while 67% of current retirees said they lean on Social Security for a "major" part of their income, only 36% of current workers are expected to do so, with another 50% claiming Social Security will be a "minor" income source. Considering that benefit cuts could be just 16 years away, and lawmakers have been unable to agree on any solutions to raise revenue, this shift away from relying on Social Security should be viewed as a positive.
Another feather in the cap for working Americans is that the median age they expect to claim benefits is 65, which compares favorably to the median age of 63, when current retirees claimed, or plan to claim, benefits. Each year an individual holds off on enrolling for benefits equates to another approximately 8% in their pockets, beginning age at 62 and ending at age 70. This would suggest that today's workers are setting themselves up for a higher monthly benefit check during retirement.
...but this is a real headscratcher
Still, as noted, there was also a frightening answer included in EBRI's Retirement Confidence Survey.
Despite working Americans choosing to wait longer to claim Social Security benefits relative to current retirees, just "23% of workers said that they chose their planned claiming age with maximizing their benefits in mind."
This is scary for two main reasons. First, it suggests that workers still don't understand the variables at work that can affect their monthly payout. In other words, workers might have an understanding that waiting to claim benefits can boost their eventual payout, but they may not have a good enough understanding of how much of a boost they'll receive (roughly 8% a year), or when that incremental increase ends (age 70). It may even imply that workers are making random guesses as to when to claim Social Security, rather than taking the steps to see what's financially best for them.
Secondly, and building off of the previous point, it overlooks the fact that some Social Security claiming decisions are about more than just yourself. In addition to providing retirement benefits, Social Security also protects qualifying long-term disabled workers and the survivors of deceased workers. If an individual doesn't take the time to understand how his or her claiming decision could affect their spouse, they could be reducing the lifetime earning potential of their spouse should they pass away. This is particularly relevant in instances where a higher-earning spouse passes away before a lower-earning spouse.
Getting in the correct mindset
In order for working Americans to overcome this hurdle, they're going to need to shift their focus away from beefing up their monthly payout and toward maximizing their lifetime benefits. That's the mindset that's truly important. And while there are no specific guidelines that guarantee you'll maximize your benefits, there are some helpful hints to guide folks in the right direction.
For example, some folks might actually benefit from claiming early -- i.e., before reaching their full retirement age, as determined by their birth year. People with chronic health conditions, lower-earning spouses, and folks who've struggled to generate income due to unemployment may benefit from enrolling early. Think of it this way: If an individual has a potentially shorter lifespan due to a chronic health condition, it makes little sense to wait extra years in order to incrementally boost their monthly payout. Claiming early, even with a resulting permanent payout reduction, would likely result in the highest lifetime benefit collection, which is the true goal.
On the other side of the coin, healthy retirees, higher-earning spouses, and those who've saved very little for retirement are usually best served waiting as long as they can before enrolling for benefits. If you haven't saved much for retirement, you're liable to be reliant on Social Security during your golden years. Thus, working longer and waiting makes the most sense.
Again, there's no perfect guideline or one-size-fits-all answer. The key point is that working Americans need the correct mindset when approaching their Social Security claiming decisions.