In case you haven't heard, America's most important social program, Social Security, is in quite the bind.
According to the annually published Social Security Board of Trustees report, the program is set to face an unwanted shift in 2020. Namely, it'll expend more than it collects for the first time since 1982. The reason? A combination of ongoing demographic changes are adversely impacting the program. Examples include the continued retirement of baby boomers, widening income inequality, increased longevity, and lower birth rates, just to name a few.
The point is that the trustees estimate 2020 to feature a $4.3 billion net-cash outflow from Social Security. Compared with the $2.9 trillion the program currently holds in asset reserves, this hardly seems like a reason to fret. However, these net-cash outflows are forecast to rapidly grow with each passing year. By the time 2035 rolls around, this $2.9 trillion in built-up net-cash surpluses since Social Security's inception will be completely gone.
Should you take your Social Security payout early?
This impending trouble has a lot of pre-retirees wondering whether or not they should take their Social Security benefit early (i.e., at age 62).
There are certainly arguments that could be made for this early claim. For example, the inability of Democrats and Republicans to work together in any meaningful way on Social Security for the past 35 years may be instilling genuine fear in Americans that nothing will be done prior to 2035 to strengthen the program.
However, a deeper dive, from a statistical and historic standpoint, suggests that rushing to claim benefits early may not be a smart idea. Here are three reasons it might be in your best interests to reconsider taking your Social Security retired worker benefit early.
1. Social Security isn't going anywhere
I believe the first obstacle that gives seniors incentive to claim their Social Security benefit early is the belief that the program won't be around much longer. In other words, the depletion of Social Security's asset reserves is viewed as the program going bankrupt. But, thankfully, this isn't the case.
Social Security has three funding sources:
- Payroll tax: A 12.4% payroll on earned income between $0.01 and $132,900, as of 2019.
- Taxation of benefits: A tax applied on a portion of Social Security benefits paid to recipients with incomes above a certain threshold.
- Interest income: Social Security's asset reserves, by law, are invested into special-issue bonds and certificates of indebtedness. These assets pay interest, which is recognized as income for the program.
Last year, Social Security brought in more than $1 trillion for the first time ever. The payroll tax ($885 billion) and taxation of benefits ($35 billion) are recurring sources of revenue. This means that as long as Americans continue to work and pay taxes, and lawmakers don't alter how Social Security is funded, there will always be income received that can be disbursed to eligible beneficiaries. These two recurring sources of income ensure that Social Security can't go bankrupt.
Long story short, it's a bad idea to take your payout early if you do so with the sole thinking that Social Security won't survive much longer.
2. Historically, Congress has come to the program's rescue
Another pretty clear concern is that, even if Social Security doesn't go bankrupt, beneficiaries could face steep cuts to their payouts if lawmakers are unable to come to an agreement on how best to remedy the program. The Trustees report does estimate the potential for a 23% reduction to retired worker benefits if nothing is done by 2035.
For example, after peaking at $45.9 billion in 1974, the program's asset reserves (which combines the Old Age and Survivors Insurance Trust and Disability Insurance Trust) had dwindled to under $25 billion by the end of 1982. Persistent net-cash outflows threatened to quickly drain what was left in asset reserves, thereby necessitating benefit cuts. That was until the Amendments of 1983 were passed.
The Amendments of 1983 represent the last major bipartisan overhaul of the Social Security program. It featured a long-range increase to the full retirement age, which is something Republicans pushed for, while also introducing the taxation of benefits and gradually upping the payroll tax rate, which is something Democrats fought for.
While it's very possible that Congress makes seniors sweat, it's likely that lawmakers pass legislation before 2035 to avoid any significant reduction to retired worker benefits.
3. Statistically, waiting will yield more in lifetime benefits
A third reason you'd be smart to consider holding off on taking your benefit is that, statistically, you have a better chance of generating more lifetime income if you wait.
As you might already be aware, the Social Security program rewards patience. Claiming at any age before your full retirement age means accepting a permanent reduction to your monthly payout of up to 30%, depending on your birth year. Yes, it does allow for more years of collecting a benefit payment relative to someone who choose to wait and claim later, but this isn't always a smart move.
In late June, United Income released a study that looked at the claiming decisions of seniors in roughly 2,000 households and compared their actual claiming age versus what would have been optimal -- "optimal" being defined as the age at which a claim would have produced the highest lifetime income. What United Income found were completely inverse results. Most seniors claimed benefits between ages 62 and 64, yet a mere 6.5% of beneficiaries in United Income's study would have made an optimal claiming decision between those ages.
Comparatively, more than four out of five claimants would have been best off claiming between ages 67 and 70, with age 70 being optimal for a whopping 57% of seniors. Today, only around 4% of retired workers wait until age 70 -- the age that maximizes your monthly payout -- to take their benefit.
Although an early claim will be right for some retirees, a majority would likely benefit in their pocketbook from being patient.