Common Social Security Blunder Could Cost Retirees Thousands!

Earlier this year, Gallup revealed that a significant 80% of adults surveyed expressed concerns that Social Security might not be available by the time they retire. In a similar vein, the Nationwide Retirement Institute found that 72% of adults worry that Social Security funds could be exhausted within their lifetimes, and 23% are doubtful they will receive any benefits at all.

These survey results aim to gauge Americans’ understanding of the potential insolvency of the Social Security trust fund. Unfortunately, the findings highlight a common and costly misunderstanding: although the trust fund might run out by 2035, it does not imply that Social Security is going bankrupt or that current workers will not receive any benefits.

Continue reading to learn more.

Social Security’s significant financial challenge doesn’t spell an end to funding

Social Security is grappling with a significant financial challenge. For the past three years, the costs of disbursing benefits have surpassed incoming revenues due to an aging population. This demographic shift is largely due to the high birth rates following World War II (known as the baby boom) and the subsequent decline in birth rates, leading to a faster-growing retired population compared to the working-age population.

This means that the number of retirees drawing from the Social Security trust fund is increasing more rapidly than the number of workers contributing through taxes. As a result, since 2021, the Social Security program has been operating at a deficit, and trustees predict the trust fund will be depleted by 2035. At that point, only 83% of the scheduled benefits will be payable, translating to an automatic reduction of 17%.

However, this doesn’t mean that Social Security is going bankrupt. Payroll taxes generate about 91% of the program’s revenues, taxes on benefits bring in about 4%, and the interest from trust fund assets contributes another 5%. Therefore, even if the trust fund depletes by 2035, two primary sources of income (accounting for 95% of revenues) will remain intact, ensuring Social Security will not run out of funds.

Misunderstanding Social Security’s financial issues could be costly for early claimers

Those who fear that Social Security funds might dry up might opt to claim their benefits as early as possible (age 62), despite receiving a smaller payout. Their aim would be to secure as much income as possible before potential insolvency. However, as mentioned earlier, Social Security isn’t going bankrupt and will continue to be funded as long as taxes are collected.

Claiming Social Security benefits at the earliest opportunity results in the most significant reduction in benefits—30% for those born in 1960 or later—which could cost thousands of dollars over time. Delaying benefits beyond age 62 can result in a higher payout, although there is no benefit to delaying past age 70.

The following chart illustrates how the total benefit income for an average male and female with a typical lifespan (81 years for males, 84 for females) would differ based on the age they start claiming benefits. This calculation assumes a birth year of 1960 or later and a primary insurance amount (PIA) of $2,042, the average in 2023.

Chart by Author. Benefit amounts are based on a hypothetical male and female with an average primary insurance amount and typical lifespans.

As depicted, the hypothetical male would gain an additional $17,200 in lifetime benefits if they claimed Social Security at age 67 rather than 62. The hypothetical female would gain an additional $48,000 in lifetime benefits if they claimed at age 70 instead of 62.

These figures do not take into account potential cuts to Social Security in 2035. However, experts generally believe that current retirees and those nearing retirement age would not be affected by these cuts. Typically, the burden would likely fall on younger workers, as has been Congress’s approach to resolving Social Security’s financial issues in the past.

Ultimately, Social Security isn’t facing bankruptcy, so claiming benefits early to maximize income before potential trust fund insolvency would likely be counterproductive. Instead, decisions about when to claim should be based on individual financial circumstances and expected lifespan.

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