Why do so many seniors claim Social Security early? Blame Congress

Social Security has been paying retirement benefits to seniors for nearly eight decades, and its importance to retired workers has seemingly grown with each passing year.

Today, according to the Social Security Administration, 34% of elderly recipients rely on their monthly stipend for 90% or more of their income, while 62% lean on the program for at least half of their income. It's simply that important to the financial well-being of our nation's 42 million-plus retirees currently receiving a monthly benefit.

But this all-important program is about to run into a brick wall. The ongoing retirement of baby boomers has allowed roughly four million new people each year to become eligible for retirement benefits, and there simply aren't new workers to take their place without the worker-to-beneficiary ratio falling.

Also, life expectancies have risen steadily for decades. Between 1960 and 2016, life expectancies rose by nearly nine to 78.8 years. We have more retirees living longer than ever before, and it's putting a lot of pressure on America's most important social program.

According to the annually released report from the Social Security Board of Trustees, Social Security is expected to begin paying out more in benefits than it's generating in revenue beginning in 2022.

By 2034, its $3 trillion in asset reserves are forecast to be completely exhausted. Should this happen, across-the-board cuts to current and future beneficiaries of up to 23% may be needed to sustain payouts through 2091. That's a pretty grim forecast.

A head-scratcher: 60% of seniors claim benefits before age 65

Yet, something that might be just as mind-boggling is the layout of when most seniors sign up for Social Security benefits.

For those unfamiliar with how Social Security works, you can claim benefits at age 62 or any point thereafter, but you're incentivized to wait, with your benefits growing by approximately 8% a year until age 70. In other words, the longer you wait, the more you'll be paid per month, based on your work and earnings history.

Your full retirement age, or the age at which you're entitled to receive 100% of your retirement benefit, is also critically important. Claiming benefits at any point before reaching your full retirement age means accepting a permanent reduction in your monthly payout. Conversely, waiting until after your full retirement age to enroll can increase your monthly payout above 100%.

On paper, you'd think the logical move for most seniors would be to maximize their payout, but the data shows we're seeing that in very few instances. The Center for Retirement Research at Boston College found (using 2013 data) that 45% of seniors claim benefits at age 63, and 60% in aggregate claim before age 65. Depending on your full retirement age, we're talking about permanent monthly payout reductions of up to 30%. Worse yet, these are probably conservative estimates since the full retirement age is 66 years and two months in 2017.

Blame Congress for many of these early enrollments

Why on earth would seniors be willing to accept lower payouts for life, you ask? For some it could be a logical decision. For example, if you're in poor health and don't expect to make it to the average life expectancy, waiting to claim benefits won't do you any good. Spouses with a substantially lower lifetime income may also choose to claim benefits early in order to generate income for the household while the higher-earning spouse's benefit grows over time.

But there's no way that these two instances encompass why three out of five seniors have claimed Social Security benefits early. My take is that Congress is to blame for many of these early claims by retired workers.

We have to go back 34 years to 1983 to find the last time Congress initiated a major overhaul of the Social Security program.

Putting aside changes to the taxation of benefits in 1993, and adjustments to the retirement earnings test for those at or above the full retirement age in 2000, things have remained relatively static for 34 years, which is a prime reason why Social Security is on a collision course with disaster.

Therefore, a big reason why seniors might be choosing to take benefits now as opposed to waiting is the aforementioned possibility of a 23% cut to future benefits.

By claiming as soon as possible, even with a permanent reduction in lifetime payouts, seniors would at least get up to 17 years of unaltered benefits (sans cost-of-living adjustments) before they'd be reduced. Some retired workers may rightly believe that waiting up to eight years, once eligible, just isn't worth it with benefit cuts looming.

Congress remains apathetically deadlocked on how to fix Social Security

Congress' lack of action certainly isn't because of a lack of ideas. There are, in fact, two core proposals that work to fix Social Security's funding problem. The issue is that Democrats and Republicans both have proposals that work, and neither will back down to find a middle ground with the other party.

Plain and simple, Democrats want to see the rich pay more. Currently, Social Security's payroll tax is levied on earned income between $0.01 and $127,200 (as of 2017). This means any earned income above and beyond $127,200 is clear of Social Security's payroll tax.

Democrats want to end this perk for the well-to-do, either by removing the maximum taxable earnings cap completely or perhaps reinstituting it on earned income above, say, $250,000 or $400,000. Doing so could completely cover the projected $12.5 trillion cash shortfall between 2034 and 2091 for Social Security. Of course, it'd provide the rich with no extra benefits since monthly retirement benefits at full retirement age are capped at $2,687 in 2017.

As for Republicans, they want to adjust the full retirement age to reflect increased longevity. They'd do this by gradually raising the full retirement age from 67 as of 2022 to 68, 69, or 70 in the years to come. It would, in effect, mean a reduction in benefits for future generations of workers, but it would protect the benefits of those already retired. Like the Democrats' idea, the GOP may be able to completely eliminate the cash shortfall with adjustments to the full retirement age.

Until we witness a major overhaul of Social Security -- which is code for "until both parties can learn to work with each other" -- we're likely to continue seeing a majority of seniors claiming benefits well before their full retirement age.