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Should You Claim Social Security Early Because of COVID-19?

The coronavirus pandemic has resulted in the fastest spike in unemployment in history. Many people are considering claiming Social Security benefits early. What will make the most sense, in the long run?

By Joe Elsasser, CFP

The coronavirus pandemic rocked stock markets and has resulted in the fastest spike in unemployment in history. Against this backdrop, many people are considering claiming Social Security benefits early. One think tank is estimating that the influx of new Social Security claimants, in addition to the reduced income from fewer people working, will cause the Social Security system to run out of funds even faster than projected – rather than 2035 as the last Social Security Trustees report indicated, it could be as early as 2029.

Accordingly, many financial advisors are suggesting that claiming benefits early may be the wiser move. It’s suggested that claiming early has two primary advantages.

1. Claiming early would provide a longer period of time in which full checks are collected.

2. When the cuts eventually materialize, it would be a smaller cut for those who claimed early.

Let’s take a look at a case study. Jane is a healthy female turning 62 this year who has a $2,000 monthly benefit at her full retirement age of 66 and 8 months. Claiming at age 62 would get her $1,433 per month. Claiming at age 70 would get her $2,533 per month. That’s a 76% increase for delaying. If we have a high level of confidence that full benefits will be paid, especially in this current low interest rate environment, then delaying is the best decision for most people. Who specifically should consider delaying?

 - Healthy people

 - Healthy single women

 - The higher wage earner in a married couple

The “claim early because Social Security is running out of money” argument is often dramatically oversimplified, and potentially causes people to claim out of fear rather than a reasoned approach. Even projecting this year’s recession as similar in scope to the Great Recession of 2008-2009, I still expect that 69% of benefits will be paid based on the current revenues after 2029. The most recent Social Security Trustee’s report suggested that 79% of benefits would be paid after 2035, without accounting for the pandemic and resulting economic impacts. Regardless of the estimate, it’s a far cry from the fear that Social Security would simply disappear.

A more refined argument would be “claim early because benefit cuts are coming.” Considering Jane’s situation above, if she claims at 62, under an assumption that benefits will be cut by 24% in 2029, then she will receive full benefits for nine years from 2020-2029, at which point her check would be cut by about $344 per month. If she delays, she will only get one year of full checks, at which point her cut will be $607. That may seem like a pretty negative outcome, but when we project the impact out over Jane’s lifetime, the impact is still not enough to suggest that most people should claim early. Below is a table of the lifetime value of Social Security benefits based on various ages of death.

Lifetime value of Social Security benefits based on various ages of death.

Lifetime value of Social Security benefits based on various ages of death.

The first column is Jane’s age at death. The second column is her probability* of reaching that age. The following columns outline the cumulative value of benefits to those ages. The figures are presented in present value, which means that they account for the fact that if you claim early, you could invest the funds**.

*Survival probabilities based on for a 62-year-old non-smoking female in average health

**Real discount rate of 0.4%

A female in average health who is 62 today has a 64% chance of living to age 85. Regardless of the benefit cut scenario that could be experienced, you’ll notice that by age 85, she would be better off by delaying benefits. When her risk of outliving her other assets grows, the benefit continues to grow, such that it is over $100,000 (in today’s dollars) by the time she reaches age 95, and she has a 23% chance of reaching that age!

In short, the possibility of benefit cuts due to the insolvency of the Social Security system is not enough to suggest that most people should claim benefits early. Of course, this is one specific case, and every situation is different, but taking a reasoned approach to Social Security claiming, even in the presence of the potential program shortfalls is a much better choice than claiming early out of fear.

About the author

Joe Elsasser, CFP®, is the founder and president of Covisum, a financial tech company focused on creating software that improves lives through better financial decisions. Covisum helps financial advisors serving mass-affluent clients in or near retirement and powers some of the nation’s largest financial planning institutions.