Why It Makes Sense to Wait for Social Security Even if Benefits Are Cut

Just because you worry that the government will cut Social Security benefits doesn’t mean you should collect it early.

In a recent article discussing life expectancies, I wrote that readers should wait as long as possible before filing for their Social Security benefit to make it as big as possible.

That provoked a number of comments from readers who noted that the Social Security trust fund was due to run out of money by 2034, and that people should file as early as possible to get the most money possible before benefits are cut.

I spoke with a couple of Social Security experts, and it isn’t so simple. Many people base claiming decisions on the so-called break-even point, the month when the additional money they receive from delay credits exceeds the money they lost from delaying filing for Social Security. And it is true that a cut to benefits would incentivize filing earlier from a break-even standpoint.

“Cutting benefits does push the math in terms of filing, earlier, but the size of that push depends on how old you are,” says St. Louis certified public accountant Mike Piper and creator of a free website that offers claiming strategies for Social Security.

The minimum claiming age is 62. So if you don’t turn 62 until 2033, you’ll derive little benefit from claiming early, Piper notes. Likewise, if you’re married to someone a lot younger than yourself who earns less than you, it may be smart to wait despite a benefits cut. That’s because that person will effectively get your benefit after you die—he or she is likely to live a long time after you die—and you want the benefit to be as large as possible.

Imagine a hypothetical couple where the man was born in 1960 and the woman in 1970. The man will get $2,500 in monthly benefits at full retirement age; the woman will get $700. The calculation assumes a 23% benefit cut in 2034. In this case, Piper’s calculator finds it still makes sense for the man to wait until 70 to claim.

Economist Laurence Kotlikoff of Boston University, who also sells Social Security optimization software, says that Social Security should be viewed as longevity insurance, and that people shouldn’t take into account their break-even point for benefits. He says that people don’t do break-even analysis for homeowners’ insurance, auto insurance, or other forms of insurance.

“People shouldn’t play the odds,” Kotlikoff says. “They are only going to die once, which might be at their maximum age. Break-even analysis is completely inappropriate from an economics standpoint.”

By the way, neither Piper nor Kotlikoff say a major benefit cut in 2034 is likely for people close to retirement. Both say they think the Social Security shortfall eventually will be fixed through some combination of higher taxes and benefit cuts for future generations of retirees.

Another reader wrote that taking Social Security early made sense because he could get returns of 7% or 8% in markets. “That’s comparing apples and oranges,” replies Kotlikoff. He says Social Security should properly be compared with a risk-free asset like Treasury inflation-protected securities. Twenty-year TIPS were recently yielding 1.56% plus inflation adjustments.

Yes, stocks should do better on average over the long term than TIPS. But there is no guarantee stocks will keep rising during your retirement. Look at what has happened in Japan, where the market has yet to reach its 1989 highs.

Another reader advised looking at family longevity to determine how long you will live. Once again, it isn’t so simple. Whereas scientists previously believed that genetics accounted for roughly 25% of life span, more recent research has put that number at under 10%. To be sure, genetics is extremely important for certain conditions. But for most people, how you live seems to be more important than the genes you inherited.

In the article, we recommended financial flexibility for retirees, saying you might have to change that Naples, Italy, vacation to a Naples, Fla., vacation. That prompted one reader to note that the trip to the Sunshine State is “quite expensive.”

She has a point. You can certainly spend plenty of money on a vacation in Naples, Fla. Tell me in the comments about destinations you like that are cheaper and worth a visit.