Most people make the wrong decisions about when to claim their Social Security benefits. Only about 4% make the optimal claim decision, according to a study released a few years ago by financial services firm United Capital.
The researchers had access to data from a long-term health survey of Americans and were able to link that information to the individuals’ decisions about Social Security claims. The data enabled the researchers to use hindsight to determine the claim decision that would have maximized the lifetime benefits for the individuals. They concluded that most Americans claim their benefits early and are short of $100,000 or more in benefits over their lifetime.
We can’t use retrospect to make our personal Social Security decisions, but we can determine probabilities of what is likely to happen and use those opportunities to improve decision-making.
Knowing what leads to less than ideal decisions can help people make better decisions. Let’s look at the reasons that seem to influence Social Security decisions and lead people away from the optimal choices.
Social Security goes bankrupt. The Social Security pension fund is running out of money. The Trustees of Social Security’s 2020 annual report, issued in April 2020, estimated that the trust fund would run out of money by 2034. That estimate was made before the pandemic recession. Several sources estimate that the recession would cause the trust fund to run out of money two to four years earlier. The trustees will publish their final estimate in the coming months.
The impending depletion of the trust fund is causing many people to reason that they should claim Social Security benefits ASAP so that they will receive some benefits for as long as they can.
But Social Security retirement benefits don’t end after the trust fund is depleted. Payroll taxes that come in each year can support an estimated 75% to 80% of promised benefits for at least 75 years. In the worst case scenario, there will be a 20% to 25% cut in benefits across the board.
But Congress is likely to intervene before that happens. Based on past actions, the benefits of those in or near are likely to be protected, except perhaps for wealthy beneficiaries. Younger people and the wealthy are likely to bear the brunt of tax increases and benefit cuts.
If Congress fails to act, it would be better to impose a benefit discount on the higher level of available benefits by waiting to claim benefits than on the lower level received by claiming benefits early. Social Security’s financial problems are not a good reason to speed up benefits.
Misunderstanding longevity. Anyone living above average life expectancy will receive more lifetime benefits by waiting to claim the benefits than by claiming early. Most people underestimate their life expectancy or don’t want to bet that they will live at least the average life expectancy.
Social Security is a longevity insurance policy. The official name is ‘old age insurance’. It is insurance against the possibility of longevity. As people age, their other assets and income sources decrease or lose purchasing power through inflation. Social security is guaranteed for life and inflation-indexed.
As retirement progresses, Social Security becomes a more important financial resource for retirees, and many wish they had waited to claim so their benefits would be higher.
Failure of spouses to coordinate and view the long term. With most couples, each spouse tends to claim benefits upon retirement or when he or she concludes that it is the right time to claim benefits. Only rarely do spouses consider which decision would maximize the couple’s joint lifelong benefits and, most importantly, what the consequences will be after one spouse dies.
When both spouses are alive, two Social Security payments come into the household. After the death of a spouse, there is only one payment in the household. The surviving spouse usually receives the higher of his or her benefits or that which the other spouse received or was entitled to at the time of death.
It often makes sense for the highest-earning spouse to defer benefits for as long as possible, ideally until age 70. This ensures that the surviving spouse, whoever it is, receives the highest possible benefit. When both spouses apply for benefits early, the surviving spouse receives a fraction that would have been possible had the higher-earning spouse deferred benefits. When only one benefit comes into the household, the surviving spouse will really feel the difference in benefits.
Not knowing the options of a surviving spouse. A surviving spouse, especially one between the ages of 60 and 70, has more options and flexibility than other Social Security beneficiaries. Unfortunately, many are not aware of these options and Social Security cannot help them much.
In a series of reports since 2015, the SSA’s inspector general documented how the SSA routinely failed to follow its policies to help different types of beneficiaries maximize their benefits. Surviving spouses were abandoned by SSA in most reports, and the agency’s performance hasn’t improved much over the years.
Surviving spouses need to understand all of their options and analyze the choices carefully. There is enough money at stake to make it worth working with a financial advisor who is familiar with the rules.
Don’t crack the numbers. Many people make their decisions about claiming Social Security with intuition or by asking friends for advice. But there are many variables in the decision to claim Social Security, and it is best to use a robust Social Security calculator to calculate the lifetime benefits under different scenarios.
in my book, Where’s the Money: Secrets to Getting the Most Out of Your Social Security, I cite several studies that showed that a retirement benefit lasts longer when Social Security benefits are delayed, even if that means taking advantage of retirement savings to fund the delay in claiming Social Security benefits. That benefit is counterintuitive to many people, which is the case with many Social Security decisions.
A number of Social Security calculators are available online at reasonable prices, including on the SSA website. Before making a decision, it’s a good idea to use one or more options to compare your options.
Social Security benefits are one of the most valuable assets available to many Americans. Their value can be increased throughout life by making the right decisions about claiming benefits.