Personal finance

Some workers fear ‘unrealistically severe’ cuts to Social Security benefits. Why that is not a reason to claim early

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Senior couple in New York City. New York is the second-worst state for retirement.
Allison Michael Orenstein | Getty Images

By now, you have probably heard that the funds Social Security relies on to pay benefits are running low.

How dire you perceive those circumstances to be is largely shaped by one thing: media headlines, according to research from the Center for Retirement Research at Boston College.

And that can affect how early you plan to claim your retirement benefits, the Center found.

Every year, the Social Security Board of Trustees release a report on the status of the program’s funding. Generally, the headlines have not been optimistic.

Take this year, for example. The 2021 trustees’ report was released in August, months later than usual as officials worked to gauge the true effects the Covid-19 pandemic.

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The pandemic moved up the depletion timeline by just one year, which was more optimistic than some earlier projections.

Still, officials concluded that the combined trust funds used to pay retirement, survivor and disability benefits have just 13 years left before they will be depleted. At that time, 78% of promised benefits will still be payable.

That’s because revenues will continue to come into the program through payroll tax contributions.

A lot of the perception of the future of Social Security is shaped by the news coverage of that announcement.

“These findings suggest that media coverage of the trust fund makes many workers fear an unrealistically severe cut to their future Social Security benefits,” wrote Laura D. Quinby and Gal Wettstein, researchers at the Center for Retirement Research, in the report.

The way headlines were worded affected people differently, the research found. Age was also a big factor in how the news determined Social Security claiming plans. One thing that was unchanged: people’s savings plans.

The research included 3,118 participants ages 21 to 61 as of 2021. They all were either currently in the labor force or had amassed 40 quarters of work in order to qualify for future Social Security retirement benefits.

The group was divided into four parts, which each saw different headlines on the 2020 trustees report.

The results found that headlines that focused on the trust fund’s woes led readers to adjust their plans to claim earlier. That ranged from half a year earlier, which was not considered statistically significant, to a full year earlier.

However, headlines emphasizing the trust fund also gave readers a more realistic view of how much of their benefits would still be payable, the research found.

Don’t file early just because you have concerns about the program 12 years from now.
Scott Thoma
investment strategist at Edward Jones

Yet none of the headlines prompted readers to adjust their future savings plans.

Those who were most likely to change their Social Security claiming plans were workers ages 24 to 54, who will become eligible for retirement benefits after the trust funds’ depletion date. In contrast, older workers ages 55 to 61 mostly did not adjust their claiming expectations based on the news.

Coverage that emphasized the ongoing revenues that will continue to help fund the program led to the most realistic expectations for future benefits among readers, the research found.

However, that information on ongoing revenues might not be enough to stop people from claiming early, the researchers concluded.

“If future beneficiaries follow through with their intention to claim a year earlier, they will lock in lower monthly benefits without increasing their saving to make up the gap,” Quinby and Wettstein wrote.

After this year’s trustees report was released, experts said that people should generally still wait to claim retirement benefits. However, that is provided they are in good health, have sufficient income and their decision will not negatively impact their spouse.

Those who are anxious may be tempted to claim retirement benefits when they first become eligible at age 62.

But by starting monthly checks that soon, beneficiaries take a 25% to 30% hit on their monthly checks depending on their full retirement age, said Scott Thoma, investment strategist at Edward Jones.

“Don’t file early just because you have concerns about the program 12 years from now,” Thoma said. “You should always be making a filing decision based upon your own personal financial situation and your own needs.

Larry Kotlikoff, an economics professor at Boston University and president of Economic Security Planning, who has a pessimistic outlook on the program, said it still generally pays to wait.

“Should people rush off to take their Social Security benefits right away? No,” Kotlikoff said.

Because benefit cuts would be politically unpopular, changes like tax increases would be more likely, Kotlikoff predicts. Even if there were a 25% reduction in benefits 10 years from now, people would still come out ahead if they wait, he said.

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