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This Social Security Mistake Is All Too Common, And It Could Cost Retirees Thousands Of Dollars
Gallup earlier this year reported that 80% of surveyed adults worry Social Security will not be available when they retire. Similarly, Nationwide Retirement Institute reported that 72% of surveyed adults are concerned Social Security will run out of funding in their lifetime, and 23% believe they will never see a dime in benefits.
In both cases, the survey questions were designed to assess how well Americans understand the impending insolvency of the Social Security trust fund. Unfortunately, the responses expose a widespread and potentially costly misconception: While the trust fund could be depleted by 2035, that does not mean Social Security is going bankrupt. Nor does it mean current workers are at risk of not receiving benefits.
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Social Security faces a tremendous financing problem, but the program will never run out of funding
Social Security has a serious financing problem. The cost of paying benefits has exceeded revenues for three years and counting due to the aging population. The combination of unusually high birth rates post-World War II (the baby boom) and lower birth rates in subsequent years have created to a situation in which the retired population is growing faster than the working population.
In other words, the number of seniors drawing benefits from the Social Security trust fund is growing faster than the number of workers paying taxes to support the trust fund. Consequently, the Social Security program has operated at a loss since 2021, and the trustees estimate the trust fund will be depleted in 2035. At that point, only 83% of scheduled benefits would be payable, meaning a 17% cut would happen automatically.
That does not mean Social Security is going broke. Payroll taxes account for about 91% of program revenues, while taxes on Social Security benefits account for 4% and the interest earned on trust fund assets accounts for 5%. So, even if the trust fund is depleted in 2035, two sources of financing (representing 95% of revenues) will be unaffected, meaning there is no chance Social Security will run out of funding.
Workers that misunderstand Social Security's financing problem could pay a high price for claiming benefits early
Anyone worried that Social Security will run out of money may claim benefits as soon as possible (age 62) despite receiving a reduced payout. Their goal would be to collect as much income as possible ahead of trust fund insolvency. But as I've already mentioned, Social Security is not going bankrupt, nor will it ever run out of funding so long as workers keep paying taxes.
So, anyone that claims Social Security as soon as possible -- thereby incurring the largest benefit reduction (30% for those born in 1960 or later) -- would shortchange themselves by thousands of dollars. That's because delaying benefits beyond age 62 results in a higher payout, though there is no advantage to delaying past 70.
The chart below shows how total benefit income for the average male and female with a typical lifespan (i.e., 81 for males, 84 for females) would change based on claiming age. The chart makes two more assumptions: (1) The birth year is 1960 or later, and (2) the primary insurance amount (PIA) is $2,042, which was the average in 2023.
|
Claiming Age |
Total Benefits (Male) |
Total Benefits (Female) |
|---|---|---|
|
62 |
$325,900 |
$377,400 |
|
67 |
$343,100 |
$416,600 |
|
70 |
$334,200 |
$425,400 |
Chart by Author. Benefit amounts are based on a hypothetical male and female with an average primary insurance amount and typical lifespans.
As shown above, the hypothetical male would receive an additional $17,200 in lifetime benefits if they claimed Social Security at age 67 rather than 62. And the hypothetical female would receive an additional $48,000 in lifetime benefits if they claimed Social Security at age 70 rather than 62.
Admittedly, those numbers do not account for possible Social Security cuts in 2035. But experts generally believe current retirees and workers nearing retirement age would not be affected by benefit cuts. In other words, the burden would fall on younger workers, which is how Congress has resolved Social Security's financing problems in the past.
Here is the bottom line: Social Security is not going bankrupt, so claiming benefits early to maximize income ahead of trust fund insolvency would almost certainly backfire. Instead, claiming decisions should be based on personal financial circumstances and anticipated lifespan.
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