One common misconception is that Social Security is on the brink of bankruptcy. Three-quarters of adults (aged 50 and older) surveyed by Nationwide Retirement Institute worry the program will run out of funding in their lifetimes, and nearly one-quarter doubt they will ever see a dime in retirement benefits.
Those beliefs have no basis in fact, but they are understandable. The Social Security program is dealing with a serious financing problem that could lead to hefty benefit cuts in 2034, and that possibility has prompted many workers to consider claiming early.
Is that the right decision?
Image source: Getty Images.
Social Security benefits cuts could be a decade away
The Social Security program is projected to run a deficit over the next decade, meaning costs will exceed revenue. That could drain the Social Security trust fund by 2034. But a depleted trust fund would lead to benefit cuts, not bankruptcy or a discontinuation of benefits.
Why? Trust fund interest accounted for 5.4% of program revenue last year. The remainder came from payroll taxes (90.6%) and Social Security benefit taxes (4%), and neither of those funding sources is at risk. So there is no chance Social Security will run out of money or stop making payments.
However, the possible loss of one funding source is still a problem with serious ramifications for retirees. Benefit cuts would be automatic once the Social Security trust fund becomes insolvent, and those cuts would be deep -- at least 20% in 2034.
Congress still has a decade to find an alternative solution, but history says benefit cuts in some form are inevitable. That puts workers nearing retirement in a tough position. It may seem prudent to offset benefit cuts by claiming Social Security as soon as possible (age 62). But that decision comes with a serious downside.
The downside to claiming Social Security benefits early
Social Security retirement benefits are calculated based on lifetime income and claiming age. First, career-average earnings are adjusted for inflation and run through a formula to find the primary insurance amount (PIA). The PIA is the benefit a retired worker will receive if they claim Social Security at full retirement age (FRA).
Then, the PIA is adjusted for early or delayed retirement. Workers who start Social Security before FRA receive less than 100% of their PIA, and workers who delay Social Security beyond FRA receive more than 100% of their PIA. The only caveats are that (1) workers cannot claim Social Security earlier than age 62, and (2) workers stop accruing delayed retirement credits at age 70, so it does not make sense to claim later.
The chart below shows the relationship between FRA and birth year, and it details the Social Security benefit (as a percentage of PIA) a retired worker would receive at different claiming ages.
Data source: Social Security Administration. Chart by Author.
As shown above, the downside to claiming Social Security early is a smaller payout, and the discrepancy is substantial at opposite ends of the claiming-age spectrum. Indeed, someone born in 1960 or later would increase their retirement benefit by 77% by delaying Social Security until age 70 rather than claiming at age 62.
Experts generally recommend against claiming Social Security early
Research shows that most people can maximize lifetime income by delaying Social Security until age 70. But very few people wait that long. Last year, 91% of new retired-worker beneficiaries claimed Social Security before age 70, and possible benefit cuts were probably a motivating factor for many of them.
I say that because 44% of adults who participated in the 2023 Schroders U.S. Retirement Survey plan to start Social Security before age 70 due to concerns the program will run out of money and stop making payments.
There is no chance of that happening, but it raises an important question: Does it make sense to claim Social Security early to offset the impact of possible benefit cuts? Experts generally say the answer is no, and there are two reasons.
First, claiming Social Security early could backfire because future benefit cuts could take many shapes and sizes. Lawmakers have proposed a plethora of Social Security fixes that would increase revenue and cut benefits to varying degrees. But there is not enough information to make an informed decision.
Second, historical precedent says future benefit cuts will probably phase in gradually, and they will probably exempt current beneficiaries and anyone who might become a beneficiary in the next decade. For example, the Amendments of 1983 effectively cut Social Security benefits by 13% by raising FRA from 65 to 67. But that change occurred over several decades and had no impact on anyone born before 1938 (i.e., anyone over age 45 in 1983).
Here's the bottom line: Retirees should weigh the known pros and cons of claiming Social Security at any particular age, while relying much less on unknown variables like possible benefit cuts. Ideally, a financial advisor should be involved in the decision-making process. Lifetime income is generally maximized by claiming Social Security at age 70, but that does not mean it's the "best" age for everyone.
