Reframing Social Security claiming decisions

Social Security is fundamental to retirement security for most Americans. Among households headed by someone aged 65 or older, more than half rely on Social Security benefits for a majority of their total income, and nearly one in five depend on Social Security for at least 90% of their income. 

One of the key financial decisions facing older Americans is when to claim Social Security retirement benefits. The timing affects how much they will receive for the rest of their lives. Unfortunately, most people do not claim Social Security at their optimal age but instead claim too early.

The economic fallout from COVID-19 has cost millions of older workers their jobs: 3 million fewer Americans aged 55 or older had jobs in July than in February of 2020, according to the Bureau of Labor Statistics. Most people who are 62 or older can replace lost income by claiming Social Security benefits but doing so earlier than they had planned will lower their monthly benefits for the rest of their lives.

“With millions of older Americans facing a high-stakes tradeoff about when to claim, it is more important than ever that they understand the consequences of their claiming decision,” warns a new study from the Bipartisan Policy Center, a think tank in Washington, D.C.

Although Social Security retirement benefits are available as early as age 62, claiming later permanently raises monthly benefits, with the maximum benefits going to those who wait to claim until they're 70. For someone whose full retirement age is 66, claiming maximum benefits at 70 rather than reduced benefits at 62 would boost their Social Security income by 76% for the rest of their lives.

“Delaying claiming is thus the equivalent to purchasing a greater inflation-adjusted annuity that will be paid for as long as the beneficiary lives,” according to the Bipartisan Policy Committee report, entitled “How to Help Americans Claim Social Security at the Right Age.”

Although the percentage of workers who claim Social Security early has been falling for decades, 62 is still the most popular claiming age, with nearly 40% of men and nearly 35% of women claiming benefits as soon as possible.

An earlier study by United Income estimates that today’s older Americans will lose a total of $3.4 trillion in potential income because of early claiming, with an average lifetime loss of $95,000 per household.

Financial advisers can play a critical role in reframing how their clients think about their Social Security claiming decisions by referring to the earliest eligibility age of 62 as the “minimum benefit age” or “reduced benefit age” and describing age 70 as the “maximum benefit age,” to focus on benefit size.

Conversely, advisers should avoid talking about “breakeven ages” — how many years a retiree would have to live in order to receive the same lifetime benefits from delayed claiming as from claiming at 62.

Breakeven analysis tends to result in earlier claiming ages because it frames later claiming as a risky gamble on living longer than average, the report said. Instead, framing delayed claiming as a “gain” and using a later claiming age as the reference point to which other claiming ages are compared have both been found to increase planned claiming ages.

At a time when few people have a traditional annuity or employer-provided defined-benefit pension, Social Security is often the only source of retirement income that beneficiaries cannot outlive. This hedge is especially important since people are living longer on average and tend to underestimate their life expectancy and consequently the costs associated with their retirement.

The Social Security Administration projects that an average 62-year-old man will live to age 82 but that 15% will reach 92. Similarly, SSA estimates that the average 62-year-old women will live to 85 but 14% will live until at least 95.

The downsides of claiming early hit widows especially hard, since the average women outlives her husband by six years. Social Security survivor benefits are worth up to 100% of what the deceased worker was collecting or entitled to collect at the time of death. When a worker claims early, it can reduce the survivor benefit.

Of course, not every client can — or should — delay claiming their Social Security benefits to optimize lifetime income. A job layoff due to COVID-19 or a similar financial shock are certainly reasons to consider claiming benefits early. But advisers should help their clients understand that retirement age and claiming age are two separate decisions.