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Kotlikoff Explains How Social Security Beneficiaries Leave Significant Benefits on the Table


Appearing on my new podcast series, Risking Old Age in America, Boston University economics professor Laurence Kotlikoff explains how on average Social Security beneficiaries lose $180,000 in lifetime benefits, most by taking their benefits too early. His newest book, Social Security Horror Stories, relates how the Social Security Administration makes mistakes and gives bad advice, sometimes demanding repayment, or “claw back,” of large amounts that were overpaid due to its own errors.

Both SSA and beneficiary mistakes stem in large part from how complicated the system is, especially when it comes to spousal benefits. But there are a number of reasons that workers choose to take their benefits too early, including the general sense that a bird in hand is worth two in the bush.

How Benefits are Reduced

The full retirement age at which workers receive their full benefits is now about age 67. (It’s incrementally going up each year until it reaches this age for those born in 1960 or later.) Workers can choose to take their benefits as early as age 62, but then have their monthly checks reduced for the rest of their lives. The reduction calculation is a bit complicated. It’s 6.7% a year for up to three years of early retirement and 5% a year beyond three years. So a worker born in 1960 or later would see a 30% reduction in benefits if they retired at age 62.

In addition, those workers who postpone taking their benefits until age 70 receive a lifetime bump in their payments of 8% for each year of delayed gratification. In total, someone who takes their benefits at age 70 will receive a lifetime benefit 43.5% greater than the same worker who took benefits at age 62. Of course, they will have given up eight years of payments between ages 62 and 70. It takes until around age 82 to make up for the higher payments to make up for the eight years of no payments (not factoring in potential earnings on benefits paid earlier or the larger annual inflation increases on those paid later).

Longevity Insurance

With life expectancy at age 65 at 17 years for men and 20 years for women, on average it’s a good bet to wait to take Social Security benefits until age 70. Further, the joint life expectancy for married couples — the likely lifespan for one or the other spouse — is 24 years. This means that it can be a gift of the higher earning spouse to the lower earning spouse to wait until 70 to start taking benefits since if they die first, the surviving spouse will keep receiving the higher benefit.

The wait increases the “longevity insurance” value of Social Security. This is the risk that we outlive our savings. Since Social Security pays out for as long as we live, the higher the benefit, the better off we are in our later years. Yet only about 10% of workers wait until age 70 to take their Social Security benefits. And, as I explained in my Risking Old Age in American blog on Substack, they are likely to be the more affluent retirees who need the benefits least.

So, Why the Bad Decisions?

Professor Kotlikoff provides a number of possible explanations for why workers take their benefits too early, including:

  • Bad advice from the Social Security Administration.
  • Misunderstanding their own likely longevity.
  • The difficulty of delaying gratification — the benefit is available at any time beginning at age 62, so it can be hard not to take is sooner rather than later.
  • Financial need. This was especially true during the Covid-19 pandemic when many people lost their jobs.
  • A sense that Social Security benefits are the worker’s own money that they socked away during their working years, rather than the pay-as-it-goes system that it really is.

Of course, there are some people for whom taking benefits early is the right choice. This can be the case if they are ill and can be pretty sure they will not live into their 80s or if Social Security benefits will save them from more serious financial consequences, such as losing their home.

Subsequent to our conversation, it occurred to me that another reason people are choosing to “take their money and run” is the precarious state of the Social Security system. Its trust fund is expected to run out of funds in 2034, at which point all benefits will be cut by 22% unless Congress gets its act together to shore up the system. Professor Kotlikoff assured me that even factoring in this reduction, according to his calculations it still makes sense for most people to wait until age 70 to begin receiving benefits.

If you are wondering when you should take your Social Security benefits, Professor Kotlikoff’s website, Maximize My Social Security, provides a calculator for determining the optimal time.

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