Baby Boomers are signing up for Social Security at a faster rate than expected. Although layoffs may be prompting some individuals to file for benefits earlier than they’d planned, over the long term they could be hurting themselves.

Based solely on the increase in the number of people eligible for benefits this year, the Social Security Administration predicted an increase in applications over 2008. However, that forecast didn’t include the possibility of an economic slowdown and higher unemployment. As a result, instead of an increase of 15%, in the first six months of the government’s fiscal year (October through March) applications are up 25%.

Dan Muldoon, a research associate at the Center for Retirement Research at Boston College, says this doesn’t necessarily mean that career-driven Boomers are hanging up their laptops and BlackBerrys and heading for the golf course. He suggests it might be just a case of needing some extra cash until a new job is found. “They might be looking for work, but if unemployment insurance runs out, it’s easy to claim Social Security if you’re at least age 62.”
Easy, but not necessarily smart.

Perhaps because the recently-released report on the financial health of Social Security predicts a revenue shortfall by 2037 -- four years earlier than last year’s report (slower economy = higher unemployment = less Social Security tax being collected), the chief actuary for the Social Security Administration felt the need to put out a written statement about the unexpected jump in benefits applications.

Check out our Social Security page for the latest videos and news on the government program.

According to Stephen Goss, the chief actuary, “the increase in applications… will increase total benefits payments in the near term.” However, he adds that “there will be no significant effect… on the long-range solvency of the… program.” The reason? The “earlier start of benefits… results in [a..reduction in the monthly benefit level for life.

As most people approaching retirement know, if you begin collecting Social Security before reaching your “full” retirement age, your benefit amount is permanently reduced. Someone who is 62 this year (the earliest age at which you can begin receiving benefits) will get 25% less than if she had waited until age 66. For instance, if she would receive $1,000/month at age 66, her check will be reduced to $750/month if her benefits begin at age 62.

In theory, whether you apply for Social Security as early as age 62 or as late as 70 (the latest age to begin) you will receive the same total benefits; they’re just spread over more years. But the problem with this is that it’s based on the assumption that you are going to live an “average” length of time. If you live longer than that, and you started collecting Social Security early, you “end up with a reduced benefit that diminishes your purchasing power at the end of your life,” says Muldoon.

In addition, considered purely in investment terms, Social Security is an inflation-protected lifetime annuity. In other words, Social Security isn’t just income, it’s insurance-- insurance against the risk of outliving your assets. And that insurance component has a value over and above the amount a retiree receives in the mail each month.

This is especially true in the case of a married couple. Let’s assume the husband is the higher-earning spouse. If he applies for early Social Security benefits, this reduces the spousal benefit his wife is eligible for while they’re both alive. However, the disparity is magnified if he dies first because the survivor benefit paid to his wife is also reduced. And the longer she outlives him, the bigger the impact.

A study by the Center for Retirement Research* found that, in fact, “households incur substantial losses as a result of early claiming.” According to the authors, there is an “optimal” age at which you should apply for Social Security benefits that depends upon, for instance, your marital status and your earnings record. They conclude that “single individuals and married men should claim benefits between 67 and 70.” On the other hand, a married woman should claim benefits earlier than a single woman.

Of course, all of this analysis assumes you have a choice about whether or not you begin receiving Social Security benefits. Obviously, if you need the money to make ends meet, it’s a no-brainer. Sign up ASAP.

The interesting thing is that while Social Security benefits applications are running higher than expected, so is the number of individuals aged 60 to 69 who are either working or looking for a job. This suggests that for some, starting Social Security is a way to provide “bridge” income until a better-paying job is found.

If you fall into this camp, keep in mind that until you reach your full retirement age there’s a limit on how much you can earn if you’re also receiving Social Security. This year the earnings limit is $14,160. For every $2.00 you earn above this amount, your Social Security check will be reduced by $1.00. However, contrary to a common misperception, you do not “lose” the money Social Security withholds. Instead, it is credited to your account; you’ll get a higher benefit in the future to reflect this.

If you land a good job and find you no longer need the income Social Security has been providing, you can suspend your benefits. You’ll be able to re-start them at a later date. According to a spokesperson for the Social Security Administration, “once they reach their full retirement age we’ll re-compute their benefits” based on the salary and work credits received from the new job. “It’s possible their benefit amount could be higher.”

Determining when you apply for Social Security is one of the most important decisions a new retiree has to make. Yet it’s typically given little thought. If you’ve got other assets, Muldoon recommends against starting benefits before your full retirement age. “Social Security shouldn’t be the end game,” he says. “If you live to age 85 and other sources of income run out, living on that smaller benefit becomes harder.”

*“How Much Do Households Really Lose by Claiming Social Security at Age 62?” Center for Retirement Research at Boston College. March 2009.

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.