Deciding to delay claiming Social Security until age 70 is one of the best financial decisions Americans can make. But only 4% of people born 1943-1947 claimed at age 70. It’s clear that sometimes people face pressure to claim Social Security benefits much earlier than they should. And those sometimes might be right now.
The COVID-19 pandemic has been hard on older people. Besides the obvious, terrible effect of the disease, the labor market has been harsh. Out of 38 million workers aged 55 and older, by February 2021, more than 2.7 million had lost their jobs or left the labor market since March 2020. That’s almost 3 million people at risk for early, involuntary retirement.
So I’m not surprised, as Alexandre Tanzi wrote for Bloomberg News last week, that more Americans are now planning to apply for Social Security benefits earlier than they wanted to.
But think twice before sinking into the arms of an earlier Social Security check. Claiming benefits before age 70 — when the maximum benefit can be claimed — means lifelong, permanent cuts in monthly payments to you, your spouse and any dependents.
In 1983, Congress cut Social Security benefits by raising the retirement age and gradually increasing the monthly benefit available if you claim at age 70. For people born after 1960, today’s 61-year olds, the Social Security system increases monthly benefits by a little under 7% per year between ages 62 and 70. Workers who delay claiming Social Security from age 62 to age 70 increase their benefits by at least 76%. That’s not a typo: Experts call the 7% rate of return per year one of the best deals on the planet. Social Security is non-profit, no fees go to shareholders, and the monthly benefit is indexed for inflation.
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Take hypothetical Nina. She has been an average earner over her career. If Nina claims Social Security at age 62, she will receive about $1,125 a month. If she waits, she is effectively “investing” her benefit in an account that pays about 7% a year. That means that if she claims at age 70, she gets $1,980 a month — or $855 more every month.
I am not saying that Congress should end people’s ability to collect reduced benefits at age 62. If you have no choice, then claim early.
But for most older workers, even in these bad times, delaying is usually the best choice. Many people can delay if they get past some emotional biases. Waiting can be worrisome: What if I die soon? What if the U.S. government collapses? But I’ll bet the house the U.S. government will always pay Social Security and we economists know most people think they will die sooner than the mortality tables predict. (Retired women are especially pessimistic — they predict they will die a full 2.5 years sooner than the average.) Predicting your early demise makes waiting to claim Social Security seem less valuable than it is.
Let’s go back to Nina. What are her options? She could spend down her $100,000 retirement account — about as much as an average 62-year-old has. This would last her eight years if she took out $1,125 per month, about as much as her early Social Security benefit would be. When she got to age 70, she could then claim the higher monthly benefit of $1,980, which is worth about $307,000 today.
Or Nina could always keep working at a low-paying job. Good news for now: Congress just helped older low-paid workers get more money by expanding the Earned Income Tax Credit to childless low-paid workers. Even if the job is lousy or even part-time — a lot of Uber drivers are older — almost anything to keep some money coming in is better than quitting and blowing through your IRA or 401(k). And, since Social Security benefits are based on 35 of your highest-paid years, it is always good to avoid “zero years.” Even if her low-income job only lets Nina delay claiming until age 65, that small delay worth is worth it because it raises her monthly benefit for life and it is indexed to inflation.
However, one option Nina should avoid is converting her savings to a private-sector annuity. The private, for-profit, annuity market is not attractive for most people. The products are expensive and complex with dizzying details and fees, like surrender charges, expense fees, death benefit fees and so on. The Social Security Administration pools retirees and doesn’t make profits, so it should make it easier for people to bridge the gap to a higher claiming age by, say, letting them use some 401(k) or IRA money to buy extra benefits in the form of credits or a short-term annuity.
In the meantime, and even in this rocky labor market, older workers who can delay claiming Social Security as close to age 70 as they can will get a big payoff — and so will their dependents.
