Social Security is our nation's most indispensable social program – and it's also in some pretty serious trouble.
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Earlier this year, the Social Security Board of Trustees released its annual report detailing the short-term (10-year) and long-term (75-year) outlook for the program. As has been the case with every report since 1985, the news wasn't good.
By the Trustees' estimate, Social Security's $2.9 trillion in asset reserves (its net cash surpluses built up since inception) will be completely exhausted by 2035, at which point retired workers could face sweeping benefit cuts of up to 24% to maintain program solvency over the long term.
The report also highlighted a $16.8 trillion cash shortfall between 2035 and 2094. The longer lawmakers wait to resolve the program's shortcomings, the costlier righting the ship will be for working Americans.
Yet not everything about the most important social program is heading in the wrong direction.
Patience is paying off
Just as the Trustees release their outlook on Social Security each year, the Social Security Administration puts out a treasure trove of current and historical data on the program via its annual statistical supplement. Contained in the latest supplement was a very promising decline in a key figure.
Between 1995 and 2016, more than 70% of retired workers receiving a benefit had their payout reduced for early retirement. As a refresher, a worker's birth year determines their full retirement age, which is when they can collect their full retirement benefit. Taking benefits at any point between age 62 (the first age of eligibility for retired workers) and the month prior to reaching full retirement age will result in a permanent reduction in the monthly payout. The opposite is true for workers who wait to take their payout until after full retirement age, with benefits permanently increasing.
This 70%-plus statistic shows that close to 3 in 4 retirees were taking their payout early and willingly accepting a permanent monthly reduction. That's worrisome given that more than 60% of current retired workers lean on Social Security as a major part of their income.
But as of December 2019, 67.3% of the close to 45.1 million retired workers receiving a benefit had their payout reduced. That marks the ninth consecutive year that early retirees declined as a percentage of total retired workers. It's also the lowest percentage of retired workers facing a permanent payout reduction in 35 years. In other words, people are being patient and waiting longer before taking their Social Security benefit.
Claiming later is usually smart
Our Social Security decision is so difficult because we (thankfully) don't know our expiration date. Without this knowledge, we can never know whether we're choosing the optimal claiming date. By optimal, I mean the decision that will net the highest possible payout over a lifetime (key word!).
The highest lifetime benefit doesn't always mean the highest monthly benefit. For instance, a person with one or more chronic health conditions may opt to take their payout early. Generally speaking, if a retired worker won't reach the average life expectancy in the U.S. of close to 79 years, it's almost always a better idea to take benefits early, even at a reduced rate.
Yet the evidence is overwhelmingly in favor of waiting to take your payout.
In June 2019, United Income released a study called "The Retirement Solution Hiding in Plain Sight," which examined the optimal claiming decisions for seniors in approximately 2,000 households versus their actual claiming decisions. United Income's findings showed two completely inverse curves. Essentially, a majority of retirees took their benefits early, but the most optimal claiming ages came later.
Age 62 – the earliest claiming age, and the one that'll result in a monthly benefit cut of up to 30% – has historically been the most popular among retired workers. Yet United Income's data found that only 6.5% of senior households made their optimal claiming decision at age 62 or 63. The study showed that 57% would have made their best claiming decision at age 70, which is when monthly payouts are maximized. The optimal claiming decision for more than 80% of retired workers came between ages 67 and 70 (i.e., after full retirement age).
Once again, claiming later doesn't guarantee you'll get more out of Social Security. Still, based solely on the data from United Income's study, and taking into account rising longevity, it's evident that patience pays off with Social Security.