As an investment adviser, I hear this question often. My clients are always hoping for a clear and simple answer but, like so many financial decisions, the answer is “it depends.” More on that later but let’s take a step back and review what this program is all about.
Franklin D. Roosevelt signed the Social Security Act in 1935 creating the federal agency behind the benefits. Two years later, in 1937, the first social security taxes were collected and regular ongoing monthly benefits began in 1940. The intent of the program initially was to provide payments to US workers upon reaching retirement as a form of supplemental income. It was not intended to replace income but, rather, provide financial support in addition to company pension plans, and other forms of personal savings. The program has been modified through the years to provide benefits to disabled workers, spouses and children of beneficiaries. Today, over 62 million people receive social security benefits making it one of our most popular social-benefit programs.
As most people know, a worker accrues benefits through a lifetime of working and paying taxes into the program. Then, in retirement a worker gets a fixed monthly payment for life subject to an annual cost-of-living adjustment. Workers need 40 “work credits” in order to be eligible for the program which amounts to approximately 10 years of work. However, benefits can vary widely based on compensation levels and the number of years paying taxes into the program. In order to achieve maximum benefits, a worker would generally need around 35 years of work at very high compensation levels. In 2019, the maximum benefit equated to a payment of $3,770/month though the Social Security Administration (SSA) indicates that the vast majority of payments fall in the $800-$2,400 range.
In order for a worker to get 100% of the benefit that he or she is entitled to receive, the worker must wait to claim benefits until reaching “full retirement age” as designated by the SSA. Full retirement age can range from 65-67 depending on the worker’s year of birth. However, the decision becomes more challenging given that the SSA allows workers to claim benefits as early as age 62 or as late as age 70. If a worker claims benefits early, the benefit is reduced and, if claimed late, it is increased. So, this brings us back to our original question. Is it more advantageous, to claim benefits at 62 and begin receiving the smaller payments or hold out until 70 to get the larger payments?
One of the key factors for consideration is whether someone needs the money. If so, then delaying benefits may not be an option. Let’s assume that delaying is an option and one is motivated to maximize lifetime benefits. In this situation, the answer depends primarily on how long the worker lives and whether the worker is married. If a non-married worker has a low life expectancy, then it makes more sense to take the money early versus waiting whereas, if the worker is going to live many years into retirement, delaying would be better. Of course, we can’t answer that question but it is possible to makes some assumptions and compute a “break even age” to help with the decision. In other words, if the worker is projected to live beyond the break-even age, then waiting is the better option. Each situation is different but most people will find a break-even age in the late 70’s. It’s also noteworthy that social security benefits can be taxable so, if one is still working up until age 70, it increases the chances that it will be beneficial to wait on claiming them. Lastly, the above break-even strategy is for an unmarried worker. If married, then the spouse’s life-expectancy also needs to be factored in. When two potential beneficiaries are considered, it often makes sense to wait given the likelihood of at least one person surviving well into their 80’s or beyond. Benefits may also be available to ex-spouses of a worker so check the SSA website for rules and eligibility.
It is worth commenting here on the fact that the social security trust is funded by current workers whereas benefits are paid to retired workers. As such, demographic shifts (i.e., a shrinking working population in favor of a growing retirement population along with higher life expectancies) are stressing the system. More specifically, 2018 marked the first year since the 1980’s where the program paid out more than it took in in tax revenue. Moreover, this situation is projected to get substantially worse in the coming years such that some economists have forecasted the $2.9 trillion in trust assets to be fully depleted within 15-20 years. It’s unclear who will pick up the tab at that point but structural changes appear to be unavoidable. For those in or nearing retirement, enjoy those payments while they last. And, if possible, try to leave a little for the rest of us.