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'It’s the Economy, Stupid!' The Social Security Sequel

By Gail Buckner Your Money Matters FOXBusiness

A record 3.2 million men and women filed to start receiving Social Security in 2009.

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Part of that is simply due to demographics: the year before, members of the large Baby Boom generation began reaching age 62, the earliest age you can claim benefits. 

But that only explains a piece of the picture. In fact, the deep and prolonged recession -- and accompanying double-digit unemployment rate -- caused more people than usual to take this step, despite financial consequences that will affect them for the remainder of their lives. 

According to the Center for Retirement Research (CRR) at Boston College, only 38.3% of those reaching the age of 62 would have claimed Social Security benefits if the unemployment rate had remained at 4.9% (the average between February and April 2008). Instead, more than 46% did. 

In other words, 21% more people began their benefits immediately because of the lousy economy.

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Furthermore, CRR researchers project that even those who were older than age 62 when they filed, did so almost a year sooner than they would have if there had  been no recession.(2)

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Source: Boston College

The impact isn’t trivial. On average, retirees who claimed early reduced their Social Security checks by $94/month. Over the course of a year, that adds up to $1,128 less income.

The “Early Bird” Haircut

As is widely known, the age at which you are eligible to receive 100% of your Social Security benefit has been slowly rising. The so-called “full retirement age” (FRA) was set at 65 when Social Security began back in 1935. In the year 2000 it began increasing by 2 months per year and currently stands at 66. This is the FRA age for anyone born in 1943 through 1954. In five years it will start increasing again. (4)

If your full retirement age is 66 and you file for benefits to begin before then, the amount you receive is reduced to reflect the fact that you will be receiving benefits for more years. Starting Social Security at the earliest date possible -- age 62 -- means your monthly check will be 25% less. For instance, if your Social Security benefit at age 66 would be $1,000/month, you will receive $750/month age 62. The closer you get to your full retirement age, the smaller the reduction. At age 63, your benefit will be 20% less, or $800/month.

The bottom line is that beginning to receive Social Security before you reach your full retirement age costs you. The reduction is permanent. Although the size of the reduction is roughly correlated to how many additional years Social Security will be sending you checks (i.e. your life expectancy), this begs the question: what if you live longer than average? In that case, taking reduced benefits sooner will hurt you in the long run.

Get Paid to Wait

Most people underestimate how long they’re likely to live. A simple calculator on the website of the Society of Actuaries will allow you to enter your current age -- and that of a spouse if you’re married -- and give you a range of probabilities. (Caution! The results may scare you.) For instance, take a Baby Boom couple where each partner is age 66. There is a 40% chance that at least one of them will reach age 92.

If you’ve got other sources of income to rely on, it often makes sense to postpone claiming Social Security because the government pays you a bonus: for each 12-month period past your full retirement age that you delay filing for benefits, your check will increase by 8%. This is called the “delayed retirement credit.” 

The individual whose Social Security check is $1,000/month at age 66 will see it go up to $1,080 if she waits a year to file. If, instead, she delays filing until age 70, her check will grow to $1,320/month -- almost a third more! DRCs stop once you reach age 70, so there’s no incentive to postpone benefits beyond this age.

But wait! There’s more. In addition to the DRC, between ages 66 (FRA) and 70, your benefit is also increased by any annual cost-of-living adjustments Social Security recipients receive over that period.

The upshot is that claiming Social Security at age 70 instead of age 62 results in a monthly check that is at least 76% larger!

Of course, if you’re laid off and need the income, as so older workers did during the recession, by all means start Social Security. That’s what it’s there for. Just be sure you understand the long-term financial consequences.

Even the Wealthy Claimed

Earlier research by CRR (3) found that the biggest predictors of whether someone was likely to file for “early”(age 62) Social Security benefits are 1) having no more than a high school education, and 2) having health issues. 

The size of your paycheck isn’t a factor. Matthew Rutledge, a research economist and co-author of the more recent study, concurs that income was not a factor in predicting at what age someone filed for Social Security.  

“You would normally see early claimers bunched at the low end of the income and skills ladder.”

 But Great Recession II affected folks across all income levels, thanks to the perfect storm: 10% unemployment + stock market sell-off + real estate bust.

As you can see from the graph below, since the mid-1990s there’s been a steady decline in the number of Americans starting Social Security at age 62. 

"People are aware they’re losing out on money, that there’s a penalty for claiming early,” suggests Rutledge. Even when we hit the mild economic slowdown in 2001, the trend plateaued for awhile and then continued downward. But when the Great Recession II took hold and unemployment shot up, so did the number of early claimers. “People were desperate and grabbed whatever [income] they could get,” says Rutledge. For now, early claiming appears to again be headed lower.

Costly in More Ways Than One

Although it’s tempting to toss in the towel and “get what you can” from Social Security” working as long as possible -- even for just a few more years -- can boost your benefit.  That’s because the size of your Social Security check is based upon your 35 highest years of income; by continuing to work, you can potentially replace those years in your 20s when you made next-to-nothing with higher paying years from a job held later in life. 

However, early claimers don’t just hurt themselves financially. Rutledge points out that work can be good for you. “You’re remaining connected to society and that has mental and possibly physical health benefits.”

Early claimers themselves aren’t the only ones who take a financial hit. For the first time in its history, in 2010 Social Security had to pay out more in benefits than it collected in payroll tax. The unexpected increase in the number of people filing for early (i.e. pre-FRA) benefits, was one reason for the sharp deterioration in Social Security’s finances announced two weeks ago.

1. Rutledge, Matthew s. and Norma Coe. “Great Recession-Induced Early Claimers: Who Are They? How Much Do They Lose?,” CRR WP 2012-12, April 2012.

2. Ten months, to be exact.

3. Haaga, Owen and Richard W. Johnson. “Social Security Claiming: Trends and Business Cycle Effects,” CRR WP 2012-5, February 2012.

4. In 2017 the Social Security full retirement age will again begin to increase by 2 months per year, until it reaches age 67 in 2022. This will be the “full retirement age” (FRA) for anyone born in 1960 or later.

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.

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