For the past 80 years, Social Security has been a financial rock for retired workers. Today, it's responsible for providing a benefit to almost 46 million retirees each month, with over 15 million of these seniors singlehandedly lifted out of poverty as a result of their payout.
It's also a program that seniors have come to rely on -- perhaps a bit too much -- to make ends meet. According to national pollster Gallup, 89% of surveyed retirees rely on their Social Security income to some degree each month, with 58% leaning on their payout as a major source of income. This is what makes a worker's Social Security claiming age so important.
Your Social Security claiming age can have a huge impact on what you'll receive each month
Although there are more than a half-dozen factors that can affect what you'll ultimately get to keep of your Social Security payout, including your work and earnings history, as well as your birth year, which determines your full retirement age, it's your claiming age that tends to have the biggest impact.
While Social Security retirement benefits can begin as early as age 62, there's a dangling carrot designed to encourage people to wait. For every year an individual holds off on taking their payout, their monthly benefit increases by as much as 8%, until age 70. All things being equal, such as work history, earnings history, and birth year, a person claiming at age 70 can net a monthly benefit that's 76% higher than an individual taking their payout at age 62.
Given this data, you'd think that most seniors are likely waiting to claim their Social Security benefit and reaping a larger monthly payout -- but this isn't the case. Historically, claiming benefits prior to reaching full retirement age (currently 66 years and eight months for those born in 1958) has been the most popular choice.
The thing is, three factors are about to make claiming benefits early, and therefore accepting a permanent monthly payout reduction, even more popular.
1. A lack of faith in Social Security's longevity
First of all, there's obvious concern about the solvency of the Social Security program.
For each of the past 35 years, the Social Security Board of Trustees has cautioned that the program's long-term (75-year) revenue generation would be insufficient to cover its outlays. This unfunded obligation is now up to $16.8 trillion between 2035 and 2094. Based on the Trustees' projections, the Social Security program will exhaust its asset reserves (i.e., net cash surpluses built up since inception) by 2035, leading to an across-the-board benefits cut for retired workers of up to 24%.
One thing to make crystal clear is that Social Security is in no danger of going bankrupt. More than 92% of its revenue is derived from recurring sources, including the 12.4% payroll tax on earned income and the taxation of benefits. This means that as long as the American public keeps working, money will always be flowing into the program for disbursement to eligible beneficiaries.
However, survivability isn't the same as sustainability. Without an injection of new revenue and/or serious outlay reductions, Social Security's payout schedule isn't sustainable beyond 2035. The fact that benefit cuts of up to 24% may be coming might prove enticing enough to encourage retirees to claim their payout early in order to front-run the projected 2035 benefit cut as much as possible.
2. Higher debt levels will drive seniors to "double dip"
Although the COVID-19 pandemic is undoubtedly not helping, consumer debt levels hit an all-time record high of $14.3 trillion by the end of the first quarter of 2020. For context, that's about $1.6 trillion higher than during the height of the financial crisis in the late 2000s.
What's more worrisome, though, is that we've witnessed senior debt levels skyrocket since the turn of the century. Median debt levels per senior household were $31,300 in 2016, up 156% since 2001, per the Survey of Consumer Finances. The number of senior households with credit card debt has risen 10 full percentage points to 34.2% since 2001, with medical debt also playing a key role.
These rising debt levels are likely going to encourage workers to claim their Social Security benefit early in an attempt to double-dip with income from an existing job. The thinking here is that soon-to-be retirees would like to enter their golden years debt-free, or darn close to it, and plan to use their Social Security income to help pay down their outstanding debt.
There's just one problem: the retirement earnings test. The retirement earnings test allows the Social Security Administration to withhold some or all of an early claimants' payout if they're earning too much money. An early filer who won't hit their full retirement age in 2020 is only allowed to earn $18,240 ($1,520 a month) before $1 in benefits can be withheld for every $2 in income above this threshold. This sort of negates the benefit of double dipping to pay down debt.
3. The COVID-19 pandemic may force seniors into early retirement
Finally, early Social Security claims can likely be traced to the coronavirus pandemic.
Over the past four months, we've witnessed the unemployment rate surge from a 50-year low of 3.5% to 13.3%, which is the highest point since the Great Depression nearly 90 years ago. In total, more than 40 million workers have filed an initial unemployment claim. With the COVID-19 pandemic absolutely pulverizing the U.S. economy, seniors may have little choice but to claim their Social Security benefits earlier than they'd like.
While unemployment rates for seniors have recently been low, it can be especially difficult for seniors to get rehired once out of the workforce. Though COVID-19 has considerably skewed the data, seniors typically spend longer durations out of the workforce than younger adults when looking for a job. That's a recipe for an early Social Security claim, especially if an individual or couple doesn't have any other sources of income or sufficient emergency savings.
Despite increased longevity and a lack of sufficient savings, it would not be surprising to see more retirees than ever taking their Social Security benefits early and accepting a potentially steep permanent monthly benefit reduction in the process.