Social Security’s solvency problems combined with advice by online financial commentators could cause Americans to accelerate their benefit claims.
Many members of Generation X and Baby Boomers who are not yet eligible for Social Security said they will claim benefits as soon as they are eligible, according to a study by Northwestern Mutual.
In addition, because of inflation and Social Security’s precarious position pre-retirees have increased by 15% the amount of money they believe is needed for a comfortable retirement to $1.46 million in the latest survey from $1.25 million four years ago.
About 25% of Generation X and 40% of Boomers responding to the survey said they will claim benefits when they are first eligible at age 62.
Fewer than half of respondents from Generation X said they will wait until full retirement age to claim benefits.
A beneficiary receives reduced benefits when they are claimed before full retirement age. The earlier they are claimed, the greater the reduction.
Maximum benefits are received by waiting until age 70. The monthly benefit rises about 8% for each year that claiming is delayed.
One reason people give for claiming benefits early is the pending depletion of the system’s trust fund. Official projections are that the trust fund will run out of money around 2032 if Congress does not act.
If the trust fund is exhausted, there will be an across the board decrease in benefits estimated to be 20% to 25%.
Social Security’s solvency problems are not a good reason to claim benefits early. Higher benefits are received by waiting.
A person’s benefits are lower when they are claimed early. The decrease will be even more later if Social Security’s finances cause an across-the-board benefit reduction.
If Congress does not act and benefits are cut, a person would receive more money for the rest of his or her life by having the reduction imposed at the higher level of benefits obtained by waiting to claim them.
When the benefits are claimed early, the initial benefit level will be lower. Then, it would be reduced further by an across-the-board cut.
Another reason people claim benefits early is that many online commentators argue that a person will end up with more money by claiming Social Security benefits as early as possible and investing the benefit payments in the stock market.
A case can be made that claiming early and investing the benefits will result in higher lifetime income. But the case relies on assumptions.
The increase in benefits for waiting to claim them is 8% annually. The increase is guaranteed (unless the Social Security trust fund runs out of money) and is tax free.
Also, the annual inflation indexing of Social Security benefits is compounded on top of the higher benefit. That compounding continues for life.
Stock market returns, on the other hand, are not guaranteed. The returns could be lower than 8%. At times, stocks lose money for extended periods.
The investment returns also would be taxed. Stocks need to return more than 8% before taxes to match the 8% tax-free increase in Social Security’s benefits.
Also, someone who can invest the full amount of Social Security benefits instead of spending them probably is earning enough income to cause part of the Social Security benefits to be taxed.
The taxes on the benefits must be factored into whether it pays to claim benefits early and invest them.
The numbers and the probabilities say that for most people the best strategy is to delay claiming Social Security benefits for as long as possible.
