Don’t make hasty decisions about when to start your Social Security benefits.
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Are you worried that Social Security benefits might be cut in the near future due to its funding challenges? Before you make a hasty claiming decision you can’t undo, be sure to analyze the issues and consequences further. Here’s more of what you need to know.
Social Security Benefits Could Be Reduced If Politicians Don’t Agree To Shore Up Its Finances
The Social Security Old Age and Survivors Trust Fund (OASI) is projected to be exhausted in the fourth quarter of 2032, and at that time, it might only be able to pay 78% of promised benefits, according to the 2026 Social Security Trustees Report. That’s a little more than six years away, well within the short-term planning horizon for pre-retirees.
The projections get a little better if the Social Security OASI fund is combined with the Disability Insurance (DI) fund, which would take an act of Congress. In this case, the combined OASDI fund is projected to be exhausted in the third quarter of 2034 and, at that time, could only pay 83% of promised benefits. That’s a little more than eight years away.
In either case, it’s understandable if pre-retirees in their early 60s are spooked—they could be facing future benefit cuts ranging from 17% to 22%. They might even be tempted to start their Social Security benefits as soon as they’re eligible, justifying this decision with a “Get it while you can! mentality”
Let’s pause, take a deep breath, and dig deeper into the considerations.
Social Security Is In Uncharted Territory
There’s no precedent for the Social Security trust funds being exhausted and Congress doing nothing to close the funding gap. And there are no published rules in place for specifying how benefits would be reduced for all retirees and beneficiaries. So, we don’t exactly know what will happen.
All we know is that if the trust funds are exhausted, the only source for paying Social Security benefits will be the FICA taxes that then-current workers will be paying. At that time, Social Security benefits would need to be reduced so that the aggregate benefits paid add up to the aggregate FICA taxes paid.
If benefits were reduced across the board on a percentage basis, then the funding percentages shown previously would equal the percentage of your benefit that you’d receive.
It’s important to note, however, that Social Security won’t go bankrupt and you won’t lose all your benefits.
Also keep in mind that no politician has advocated reducing the benefits of current retirees and near retirees, and President Trump has repeatedly promised not to cut Social Security benefits.
Implications For Claiming Social Security Benefits
Many retirement analysts, including me, suggest that the current optimum strategy for claiming Social Security benefits is often to delay the start of benefits for as long as possible. In many cases, the optimum starting age is 70, which is the maximum starting age with the highest monthly benefit. However, this conclusion is based on the assumption that future benefits won’t be reduced.
For the sake of this post, however, let’s suppose you’re pessimistic that our polarized federal politicians will be able to agree on a solution to close Social Security’s projected funding gap. Let’s also assume a worst-case scenario—that Social Security benefits would be reduced by 22% near the end of 2032.
In this case, here’s an important question to consider: Should you start your Social Security benefits as soon as possible, so you at least receive some money before benefits are cut?
I asked this question of Mike Piper, author of Social Security Made Simple and developer of the free, online system Open Social Security that analyzes optimal claiming strategies. Here’s Piper’s answer to these questions: “It does indeed push the decision in favor of filing earlier, though whether that push will overcome the various other factors will vary case by case.” Piper also points out that the closer you get to the year Social Security benefits might be reduced, the less you might gain by claiming Social Security benefits early.
Looking Deeper
After getting Piper’s input, I fired up his Open Social Security system to see how the optimum strategy could vary for a few hypothetical pre-retirees. Piper’s system prepares recommendations based on comparing the estimated present value of your lifetime benefits for all possible starting ages, based on your particular circumstances.
The Open Social Security system has a feature that allows you to assume a future reduction in your benefits. I assumed that benefits would be reduced by 22% at the beginning of 2033, the time right after the 2026 Social Security Trustees Report projects that the Social Security trust fund will be exhausted.
To properly analyze someone’s optimal claiming strategy, Piper’s system needs you to input your monthly “primary insurance amount (PIA),” which is the projected benefit at your Social Security full retirement age (age 67 for most pre-retirees). The PIA amounts that I assumed are noted below in the hypothetical examples. Piper’s system shows how you can estimate your PIA, if you don’t know.
For the sake of these tests, I also assumed the all the hypothetical pre-retirees would have better-than-average health, which might be applicable to readers who have a college education and above-average wealth and earnings.
These analyses all show that the optimum financial strategy depends in part on your marital status and gender. Let’s take a look.
No Change In The Optimal Strategy For A Hypothetical Married Couple
I assumed that both spouses of a hypothetical married couple reach age 62 in January 2027. I assumed the monthly PIA was $2,000 for the husband and $1,000 for the wife, a common situation.
In this example, assuming no future reduction in Social Security benefits, the optimal claiming strategy is for the husband to start his Social Security benefits at age 70, and for the wife to start her Social Security at age 62 and one month. The optimal starting age didn’t change if I assumed the future benefits reduction noted previously.
The Optimal Claiming Age Drops Significantly For A Hypothetical Single Man
I assumed that a hypothetical single man reaches age 62 in January 2027 with a monthly PIA amount of $2,000. In this example, assuming no future reduction in Social Security benefits, the optimal claiming age is age 67 and 11 months. However, the optimal claiming age drops more than five years to age 62 and 3 months, assuming the future reduction in Social Security benefits described previously.
The Optimal Claiming Age Drops Moderately For A Hypothetical Single Woman
I assumed that a hypothetical single woman reaches age 62 in January 2027 with a monthly PIA amount of $2,000. In this example, assuming no future reduction in Social Security benefits, the optimal claiming age is age 68 and 11 months. However, the optimal claiming age drops more than three years to age 65 and 5 months, assuming the future reduction in Social Security benefits described previously.
There Are More Considerations To Consider
As you can see with these three examples, the impact on the optimal claiming age varies significantly depending on your marital status and gender. Another important factor is your health and your estimated lifespan.
Another consideration is that a present value analysis is just one factor in deciding when to start Social Security benefits. Instead, you might consider your cashflow in your later years. For example, there could be good reasons to maximize your Social Security benefit by waiting to claim it if you want to maximize your monthly incomes in your later years to help protect against cognitive decline, when you’re less able to manage your finances.
You’ll also want to consider Social Security’s earnings test, which can temporarily reduce Social Security benefits before your Full Retirement Age (currently age 67) because you continue to work for income. This would impact the analysis for both the hypothetical single pre-retirees.
One factor to consider with all these analyses is that whether you claim Social Security benefits as soon as possible or you delay your benefits, you still won’t escape a benefits reduction if it takes place. In many cases, it’s better to realize 78% of a larger benefits amount compared to 78% of a smaller amount, which supports the case to delay claiming your Social Security benefits.
Here’s yet another consideration: It’s possible that benefits might be reduced for a short period, but then politicians will restore benefits due to potentially extreme blowback from older voters. If this happened, you could be stuck with an early claiming decision that provides fewer funds that you could have received.
For most retirees, Social Security benefits will be the bedrock of your financial security in retirement. Because of this, it’s well worth your time to research your optimum Social Security claiming strategy in light of your personal circumstances and your optimism or pessimism that our politicians will take the responsible action to shore up Social Security’s finances.
