Earlier this year, the Social Security Administrative Council released its annual report detailing the short-term (10 years) and long-term (75 years) outlook for the program. As with all reports since 1985, the news was not good. According to the trustees’ estimate, Social Security’s $ 2.9 trillion in reserve assets (its net cash surpluses accumulated since its inception) will be completely depleted by 2035, when retired workers could do so. facing benefit cuts of up to 24% to maintain the solvency of the program over the long term.
The report also highlighted a shortfall of $ 16.8 trillion between 2035 and 2094. The longer lawmakers wait to fix the program’s shortcomings, the more the turnaround will cost working Americans.
Yet not everything about the most important social program is going in the wrong direction.
Patience pays off
As administrators release their social security outlook each year, the Social Security Administration makes available a treasure trove of current and historical data on the program through its annual statistical supplement. The latest supplement contained a very promising drop in a key figure.
Between 1995 and 2016, more than 70% of retired workers receiving a benefit had their payment reduced for early retirement. As a reminder, the year of birth of a worker determines the retirement age at full rate, that is to say the moment when he can receive his entire retirement benefit. Taking benefits at any time between the age of 62 (the earliest eligibility age for retired workers) and the month prior to full retirement age will result in a permanent reduction in the monthly payment. The opposite is true for workers who wait to receive their payment until full retirement age, with benefits steadily increasing.
This statistic at over 70% shows that nearly 3 in 4 retirees took their payment early and willingly accepted a permanent monthly reduction. This is worrying given that more than 60% of current retirees rely on Social Security as a significant part of their income.
But in December 2019, 67.3% of the nearly 45.1 million retirees receiving a benefit saw their payment reduced. This is the ninth year in a row that early retirees have declined as a percentage of total retired workers. It is also the lowest percentage of retired workers facing a permanent reduction in their pay in 35 years. In other words, people are patient and wait longer before taking their Social Security benefits.
Claiming later is usually smart
Our Social Security decision is so difficult because we (luckily) don’t know our expiration date. Without this knowledge, we can never know if we are choosing the optimal claim date. By optimal, I mean the decision that will yield the highest possible payout over a lifetime (keyword!).
The highest lifetime benefit does not always mean the highest monthly benefit. For example, a person with one or more chronic health conditions may choose to receive their payment sooner. Generally speaking, if a retired worker does not achieve the average life expectancy in the United States of nearly 79 years, it is almost always better to take benefits early, even at a reduced rate.
Yet the evidence overwhelmingly supports waiting to receive your payment.
In June 2019, United Income published a study called “The Retirement Solution Hiding in Plain Sight,” which looked at optimal claim decisions for seniors in around 2,000 households versus their actual claim decisions. United Income’s results showed two completely opposite curves. Essentially, the majority of retirees took their benefits early, but the most optimal claim ages came later.
The age of 62 – the earliest age to claim, and the one that will result in a reduction in monthly benefits of up to 30% – has historically been the most popular among retired workers. Still, United Income data revealed that only 6.5% of senior households made their optimal claim decision at 62 or 63. The study found that 57% would have made their best decision to claim at age 70, which is when monthly payments are maximized. The optimal grievance decision for over 80% of retired workers was between 67 and 70 (i.e. after full retirement age).
Again, claiming later does not guarantee that you will get more out of Social Security. Yet, based solely on data from the United Income study and taking into account increasing longevity, it is evident that patience pays off with Social Security.