Since the government issued the first monthly Social Security check in 1940, the landscape of retirement funding in the United States has shifted considerably. One of the most notable shifts has been the reduction of employer-provided pensions. Instead, Americans are now mostly responsible for their own retirement savings via personal investment accounts such as 401(k)s and IRAs.
In the middle of this transition, Social Security has become an increasingly important source of income for retirees. According to a recent Gallup poll, nearly 60% of seniors rely on Social Security as a main source of income during retirement, making it critical for millions to maximize their program benefits.
Because of this increased reliance on Social Security, knowing its complexities is more vital than ever, especially since the system has not undergone significant modifications since the 1980s.
Fortunately, the system’s outmoded structure has unintentionally created chances for recipients to maximize their returns. By knowing these discrepancies, seniors might position themselves to receive greater Social Security benefits than they might otherwise expect.
Social Security quirks beneficiaries should know about
Originally, Social Security was intended to offer approximately the same total payout in lifetime benefits, regardless of when a person began collecting. This notion was designed to maintain fairness regardless of whether someone claimed early or at a later age. Adjustments were made in 1983 to reflect the time’s life expectancy forecasts.
This included modifications to how monthly benefits were adjusted for persons who claimed Social Security after the age of 62, when they were first eligible. However, forecasting life expectancy is a difficult process, and the government’s estimations were not completely accurate.
Current CDC life expectancy data reveal that pensioners now can optimize their benefits by claiming at a specified age, which was not fully considered when the 1983 revisions were made.
Social Security benefits are computed using a person’s main insurance amount (PIA), which is defined by their earnings record. The age at which someone claims benefits in relation to their full retirement age (FRA) is also important.
For those born between 1943 and 1954, the FRA is set at 66. For those born after 1954, the FRA steadily rises, reaching 67 for those born in 1960 or after. The 1983 modifications also made changes to payments for those who claim before or after attaining the full retirement age.
Individuals who opt to collect Social Security at age 62, for example, will have their monthly benefits permanently reduced. On the other hand, waiting the claim until age 70 will result in the greatest monthly benefit possible. However, individuals who wait until age 70 must forego any benefits for several years and will need to live long enough to “catch up” with those who claimed earlier.
Individuals can consider their alternatives by looking at “breakeven” ages, which are the ages at which someone who delayed claiming Social Security begins getting greater total payments than if they had claimed earlier.
Data from the CDC provides some useful insights into this estimate. The CDC’s life expectancy tables, which were updated in November 2023 based on 2022 data, provide projections for how long retirees can expect to live. For example, a 62-year-old retiree today can expect to receive more Social Security benefits during their lifetime by delaying their claim well into their full retirement age.
By age 65, the case for waiting becomes even stronger; but, as someone approaches 70, it may be prudent to consider claiming benefits slightly before hitting that milestone. According to the most recent data, the average 70-year-old has a life expectancy of approximately 85 years and four months. According to this research, most persons would maximize their lifetime benefits by filing right before they turn 70.
It’s worth noting that these life expectancy projections are based on data from 2022, which includes the effects of the COVID-19 pandemic. Looking back at 2019 data, the average life expectancy for a 70-year-old was approximately 86 years, and life expectancy has generally been increasing over time.
This growing trend contributed to the passage of Social Security changes in 1983. Assuming that life expectancies continue to climb, it confirms the notion that postponing Social Security benefits until age 70 is likely the best plan for most people, unless there are worries about a shorter-than-average lifespan.