The Impact of Early Social Security Claims
When it comes to Social Security benefits, the choices individuals make can have lasting financial consequences. If you claim your benefits at the age of 62, you will receive only 70 percent of your full entitlement. Conversely, if you wait until you reach 67, you will receive your full benefit, and by delaying until age 70, you can collect a remarkable 124 percent of your expected benefit. The financial incentive for postponing benefits is substantial; for many individuals, the best course of action is to continue working or utilize their retirement savings temporarily to manage expenses while deferring their claims.
A 2022 study revealed that “virtually all” American workers aged 45 to 62 should postpone claiming Social Security benefits beyond age 65. The findings suggest that more than 90 percent of these individuals should ideally wait until age 70 to begin receiving their checks. However, the reality is stark—only about 10 percent of people actually do so, with many opting to collect benefits as soon as they become eligible at 62.
In plain terms, these early decisions often lead to costly mistakes. The study indicated that the median loss in present value of lifetime discretionary spending for this demographic is approximately $182,370. To put this figure into perspective, it’s enough to purchase a luxurious Mercedes AMG-S63 or cover a significant portion of medical expenses.
Two questions intrigue me regarding this issue. First, why do individuals make such financially detrimental choices when the consequences are so often avoidable? Second, why does our system facilitate these unwise decisions? I liken premature claims to participating in state-run lotteries, which tend to exploit the hopes and vulnerabilities of those seeking financial relief. Personally, I refrain from claiming early and steer clear of lottery tickets. The choices of others, however, inadvertently create a financial advantage for me, as their mistakes may reduce the tax burden I face, which seems inequitable.
That said, it’s important to acknowledge that delaying claims isn’t the best option for everyone. For those in poor health or who have reason to believe they may not live long, it may be prudent to claim benefits as soon as possible. Additionally, if an individual fears bankruptcy or significant financial strain without the onset of Social Security payments, claiming early may be a necessity. According to a report by the Center on Budget and Policy Priorities, around 40 percent of individuals in their early 60s report having a disabling condition, and a similar percentage of recent retirees indicate they were compelled to leave the workforce. For many in such circumstances, early claiming of Social Security may be unavoidable.
Nevertheless, a significant number of retirees possess the ability to wait but choose not to. Research conducted by Suzanne Shu at Cornell University delves into the psychology behind early claiming. She has found that many individuals, when surveyed in their 50s, express intentions to delay their claims, recognizing the financial benefits of waiting. Yet, as they near the age of 62, their resolve often weakens, leading to premature decisions that could adversely affect their financial futures.
