Social Security Recipients Aren't Interested in Waiting to Claim Benefits
Most seniors think waiting to claim benefits is a sucker's bet.
Behavioral economics explains why immediate gratification is largely to blame for disinterest in waiting to claim Social Security benefits.
Today’s near-retirees grew up with MTV. The unending, quick video images presented immediate gratification to this generation.
Spreading affluence in a growing middle class spawned millions of babies who couldn’t give a fig for waiting even a minute for their next ice cream cone. Patience? Who needs that when every urge and yearning for things material can be satisfied immediately with instant gratification.
And so, it is natural to understand today’s reluctance by seniors approaching receipt of Social Security benefits in terms of behavioral economics. Especially, since the Social Security Administration keeps broadcasting a drum beat of concern. The Social Security Trust Fund will be forced to lower benefits 21% by 2033 if nothing is done to shore up the system.
So it is quite understandable that millions of people are now panicked into taking their benefit early. Better to get a smaller payout now, than 21% less, or even nothing, later.
For these frightened seniors, a smaller guaranteed payout now, for the next 9 years, is better than an even smaller payout in the future that may never even come at all. In these circumstances, immediate gratification and smaller payouts will win out, every time.
Patience: Who needs that when I can get my money NOW!
Nearly half of workers plan to claim Social Security before they’re eligible for full benefits, a new survey finds.
Some 43% of respondents said they planned to file for benefits before age 67, the age for Americans born in 1960 or later to receive full benefits, according to the Schroders 2024 U.S. Retirement Survey.
Workers cited concerns that Social Security would run out of money or stop paying benefits, and a need for the money, as top reasons for planning to claim early. The most popular ages when workers planned to file for Social Security were 65 (23%) and 62 (12%). Just one in 10 planned to wait until age 70 for their maximum benefit, or 124% of the full benefit.
Actual numbers from Social Security filings tell a similar story. Of the roughly 2.7 million people who filed for their retirement benefits in 2021, just 10% were 70 or older, according to a Congressional Research Service analysis of Social Security data. A quarter of the new filers were 66, which was the full retirement age for the cohort claiming in 2021, while 29% claimed at age 62.
“You’re basically leaving money on the table if you’re not waiting for full benefits,” says Deb Boyden, head of U.S. defined contribution, Schroders.
Claiming retirement benefits at the earliest eligibility of 62 results in payments that are about 30% lower than what they would be at 67. That’s a permanent reduction for the rest of your life. Say your benefit at full retirement age is $3,500 a month. If you claim at 62, you would get just $2,450 monthly, while if you can wait until 70 you would receive $4,340. Unlike most private annuities, Social Security benefits are adjusted for inflation annually.
Many people are willing to accept less because they fear that if they wait, they may not get anything at all. Yet Social Security, while in financial straits, isn’t running out of money. The program is mainly funded through a dedicated payroll tax, with today’s workers paying for today’s retirees.
Social Security’s trust fund is currently making up the difference between what the program owes in promised benefits and what it collects in payroll taxes. The retirement fund is projected to run dry in 2033, barring congressional action, according to estimates by the Social Security Trustees. If lawmakers don’t act — and most experts predict that they will — then retirement benefits will automatically be cut by 21%, with payroll taxes continuing to fund the remainder of promised benefits.
Another reason that some people plan to claim early is to invest their Social Security benefit. However, it would be hard to beat the guaranteed 8% increase that Social Security offers in delayed retirement credits annually from full retirement age to 70. The S&P 500 index delivered 24% returns last year, but investors can’t count on such a blockbuster performance year after year. It declines nearly three years out of 10, forcing retirees to spend down their nest egg if they rely on stocks.
Social Security should be considered more bond-like due to its guaranteed returns. Yet few safe bonds deliver a guaranteed 8%.
Couples have an additional concern. The formula for survivor benefits is more generous than that for spousal benefits — in some cases, a surviving spouse can earn up to 100% of their partner’s benefit, including delayed retirement credits — so it can make sense for the high earner to delay collecting to make their future widow(er)’s check as large as possible. However, if the surviving spouse starts his or her Social Security benefits before full retirement age for survivors, their benefit will be reduced.
My Personal Journey
Everyone must make their own decision that suits their particular financial circumstances. If other assets, ongoing income, pension funds, dividends and interest from savings accounts are available to fund retirement expenses, it would be wise to delay taking Social Security benefits until full benefit age is reached. Even better, waiting to age 70 will get retirees 32% more income, for life.
Because there are few guaranteed investments that garner 8% increased income each year, this is a great way to guarantee 32% more income, for life.
I was fortunate enough to be in this category. After I turned 70, my wife collected benefits under my earnings record. When she turned 70, she then claimed benefits under her own earnings record, substantially increasing her monthly benefit.
Throughout history, each time benefits have come under siege, Congress has made fixes to the system that have extended and protected these benefits.
Simple fixes and my conclusion are detailed, below.