Social Security very likely is the most important social program in this country. Since it was signed into law in 1935 and first began making payments to retired workers in 1940, it's propped up low-income elderly Americans who've qualified for benefits.

It also is a program that's heavily leaned on by the American public. Whereas the Social Security Administration (SSA) suggests that benefit checks are only designed to replace approximately 40% of working wages during retirement, some 62% of retired workers today lean on the program for at least half of their monthly income. Without Social Security's guaranteed monthly payout, it's likely that elderly poverty rates would be much higher than they are today. In fact, an analysis from the Center on Budget and Policy Priorities found that the program is singlehandedly responsible for keeping nearly 15.1 million retired workers out of poverty each year.

But according to a newly released study from the National Bureau of Economic Research (NBER), your Social Security claiming decision and income status can hold a lot of bearing on whether or not you'll stay above the federal poverty line later in life.

A person filling out a Social Security benefits application form.

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The ins and outs of claiming Social Security benefits

First, a little background on claiming age.

As you may or may not be aware, on June 30, 1961, then-President John F. Kennedy signed into law the Social Security Amendments of 1961. Among the changes introduced was the lowering of the minimum age where retired workers could begin collecting benefits from 65 to age 62.

In return for being able to access their Social Security retirement benefit earlier, workers would accept a permanent reduction in their monthly payouts. Essentially, it offered a choice: Wait and receive a larger payout or take the payout early at a reduced rate. 

As decades have passed since 1961, the basic tenet of this choice has remained the same, albeit the choice itself has grown a bit more complicated. That is, the full retirement age -- the age at which you're eligible to receive 100% of your retirement benefit -- is steadily climbing to 67 years (which will be hit in 2022). This increase in the full retirement age impacts the permanent reduction or increase retirees will receive, based on their claiming ages.

How so, you ask? Depending on your full retirement age, which is determined by your birth year, claiming at the earliest age and month possible (age 62) could cause your benefit to be reduced by up to 30% compared to what it would have been had you waited until age 67 (for people born in or after 1960).

But for every year that you hold off on signing up, your benefit grows by approximately 8%, up until age 70. This means that if you were to claim benefits at age 70, you could net an increase of 24% to 32% above your full retirement benefit, depending on your birth year. It's all a matter of choice and financial need.

An elderly man counting a fanned pile of cash in his hands.

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Some early claimants are shortchanging themselves, study finds

So when do most workers enroll for benefits? According to the newly released NBER analysis, which reviewed Social Security Administration data between 1968 and 2001, the introduction of the early retirement option reduced the long-run average claiming age by 1.4 years. And as noted above, a reduction in claiming age means that retired workers willingly have accepted a reduction in their permanent payouts.

The NBER analysis finds that, between 1968 and 2001, the Social Security income for male-headed families who were early claimants declined by 1.5% at the mean, by a more robust 3% at the median, and by an even larger 4% for those male-headed families that were in the lowest quartile of the Social Security income distribution. In plainer English, claiming early tended to reduce the income that families received over their lifetimes, but it was particularly noticeable for lower-income, male-headed families.

NBER's analysis led to two key findings. First, that the introduction of early retirement options raised the elderly poverty rate by about 1 percentage point over more than four decades. And secondly, the ability to claim early was associated with a marked increase in income inequality.

A scowling wealthy senior in a suit.

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This latter issue, income inequality, is one of Social Security's most under-the-radar challenges today. In particular, since lower-income folks may lack access to preventative care and medicine and the well-to-do don't, higher-income individuals tend to live longer and are able to pull in a Social Security benefit for an extended period of time relative to lower-income individuals and families. 

Understandably, NBER's analysis isn't perfect. Longevity has increased since the years that were examined, but nothing specific in the study looked at lengthening life expectancies. Also, the dynamics of the American household have changed pretty dramatically since the 1960s, meaning everything from marital status to education could alter how elderly poverty rates and income inequality are interconnected to an early claiming decision today. Still, it provides a pretty compelling argument that claiming early, for at least some folks, can be a damning decision. 

Claiming early makes sense for some people

While the broad-based gist of NBER's analysis is that claiming early benefits could lead to an increase in elderly poverty rates, not all beneficiaries have the option of waiting to claim benefits. In fact, claiming Social Security benefits at age 62, or at least well before full retirement age, could make perfect sense under the right scenario.

For example, if an individual isn't in good health or has a chronic health condition, waiting a few years to grow their monthly benefit may not make much sense. The goal of Social Security is to maximize your lifetime -- not monthly -- payout. In such an instance, claiming benefits at age 62 may be the best course of action since it'll provide an immediate, albeit reduced, benefit.

A senior couple discussing paperwork with a financial adviser.

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Similarly, low-income spouses also may benefit from claiming benefits early. If one spouse earned significantly more during their lifetime, it makes sense to allow that individual's benefit to grow over time. Therefore, in order to generate some income for the household, it usually makes sense for the lower-income spouse to claim benefits early.

Though there's no perfect formula in determining when to claim benefits, early claiming can be a reasonable, if not smart, option for some folks. Then again, for individuals with little money saved, claiming Social Security benefits early could indeed lead to an increased chance of late-life poverty.

In sum, your Social Security claiming decision is growing more important than ever. Ensure you give it the proper thought and attention it deserves.

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