Should You Claim Social Security Early Before You Run Out of Money?

Millions of Americans depend on Social Security for a large portion of their income in retirement. Millions more expect Social Security to be there in the future when they need it, either for retirement benefits at the end of their careers or for disability benefits if something happens to them beforehand.

But Social Security financial news has long been grim. Due to demographics and the increasing number of retirees claiming the program, the Social Security trust funds are likely to run out of reserves sometime in the mid-2030s. That gives lawmakers only about a dozen years to figure out what they’ll do about the program’s potential financial bottlenecks.

If Washington does nothing, Social Security revenues will be enough to pay only about 80% of current benefit entitlements. Due to the possibility of that 20% haircut in the future, some people are changing their minds about waiting longer to take Social Security, and instead thinking they should get what they can before cuts affect their monthly checks.

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However, as you will see below, there are some reasons to expect a better result. For this reason, I don’t typically recommend anyone base their decision about when to claim Social Security solely on the basis of the financial condition of their trust funds.

1. The legislature figured it out beforehand

The last time Social Security had a major financial crisis was in the early 1980s. Just prior to this, high inflation and relatively low wages put a new financial strain on the program as benefits rose in line with prices but payroll tax revenues did not keep pace.

Congress and the White House were controlled by different political parties, but lawmakers still found ways to address the issues that threatened the system. Ultimately, a new tax on benefits for earnings above certain income limits, as well as a gradual increase in the full retirement age from 65 to 67 for future recipients, helped cushion the blow and buy time for the program.

Similar adjustments would be possible now and would address coming financial problems for Social Security. A combination of payroll tax hikes, alternative inflation measures and potential retirement age increases could close the gap between program revenues and expenditures.

2. Washington won’t work out the stomach for outright cuts

From a more cynical perspective, the bearish argument for Social Security rests on the idea that if the Social Security trust funds ran out of money, the government would simply roll out automatic benefit cuts. This could technically be what the laws governing Social Security would require, but it is highly unlikely to happen in practice.

Already, older Americans tend to exercise their political power more than younger voters. Such was the outcry from much of the American public about benefit cuts that anyone who failed to help cover the cut in benefits would likely lose their next election.

Compared to the multi-trillion-dollar deficits the federal government has been running in recent years, annual spending to meet the missing revenue from Social Security and other sources would be manageable. It is therefore likely that, unless Washington finds a better solution, it will simply pull money from the general fund, rather than relying solely on payroll taxes and other dedicated sources of Social Security funding.

Don’t lose your nerve

Since the threat of Social Security cuts is probably overstated, there’s good reason to simply follow your optimal benefit claiming strategy. For some, that means waiting longer before claiming benefits, hoping to get bigger monthly checks long enough to stay ahead. For others, it makes more sense to claim at full retirement age or earlier.

Regardless, you’re unlikely to be trying to anticipate the future of Social Security for a better outcome. You’re better off working through the most likely scenarios and then developing a game plan flexible enough to handle whatever comes your way.

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