This spring, something unexpected happened: the number of people applying for Social Security benefits surged. Between January and May, the number of Americans who applied for Social Security jumped by nearly 18% compared to the same period last year. What's more, the Social Security Administration (SSA) is on track to receive nearly 4 million retirement claims this year, an increase of more than 525,000.
What's driving the surge? According to the Urban Institute, the primary reason claims are up appears to be the increased fear and confusion Americans have after proposed (and actual) changes to the SSA. After the closing of some SSA offices and rumors of a potential cut to benefits, people who've spent decades planning for retirement and counting on Social Security to help fund it are afraid the payments won't be there when they need them.
In June, to get an idea of why so many people are claiming retirement benefits earlier than planned, AARP conducted a national survey. Among the respondents, 49% said they're afraid that Social Security is running out of money. On a related note, an increasing number of people filing Social Security claims are 62 years old, the earliest age a person can file.
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A misunderstanding that could cost retirees
AARP's survey reveals just how deeply ingrained misunderstandings about Social Security are. For example, nearly two-thirds of those asked didn't understand what would happen if the Social Security Trust Fund were to run dry. More than 33% believed that payments would stop entirely, while another third said they weren't sure.
After being informed that Social Security would still be able to pay out a portion of benefits even if the fund ran out of money, 47% of respondents estimated that payments would be cut by 50% or more.
For those who have built a retirement strategy that includes Social Security benefits, believing they could lose nearly half of the money they're counting on is sure to be frightening. It would also help explain why some might decide to begin collecting benefits earlier than expected.
The Social Security Trust Fund's reality
Even if the Social Security Trust Fund were to run out of funds, benefits would continue in some form thanks to the millions of workers who continue to pay Social Security taxes (the "FICA" -- Federal Insurance Contributions Act -- money that's deducted from paychecks).
In 1983, the Trust Fund was set to run out of money within months. At that point, Congress enacted the Social Security Amendments, a package designed to address both short-term solvency concerns and long-term financing issues. According to the SSA, that bipartisan act was the last major Social Security legislation of the 20th century.
If today's Congress can work in a bipartisan manner, they have it within their power to come up with a fresh solution to the funding issue, just as Congress did 42 years ago. However, if they can't or won't, the program's trustees estimate a 19% reduction in benefits.
A 19% cut is certainly better than a 50% cut, but it would still mean a person receiving $2,000 monthly in benefits would see their check reduced to $1,620.
Financial impact
While it's natural for people to want to get the most from a system they've spent decades paying into, receiving Social Security retirement payments early does have a downside. Claiming Social Security at age 62 rather than waiting until full retirement age (FRA) means a reduction in monthly benefits of up to 30%.
For most of today's workers, FRA is around 67. For every year they delay claiming Social Security up to age 70, they'll receive an 8% increase in benefits from that primary insurance amount. For example, a retiree who qualified for $2,000 a month at age 67 would get $2,480 by waiting to claim till age 70.
Although millions do, not everyone counts on Social Security benefits to fund their retirement. For those who've been investing and saving for it for years and even have a retirement withdrawal strategy in place, a reduction of Social Security benefits may not seem like a big deal. But for those counting on every dollar promised by SSA, any cuts could be dramatic.
Deciding when to begin receiving Social Security is an important financial decision, one that should be based on up-to-date and accurate information. Making a fear-based decision, while understandable, can lead to a permanent reduction in benefits -- which is precisely what some early filers were hoping to avoid in the first place.
