It Might Be Worse To Take Social Security At 66, Here's Why

Nov. 26, 2018 6:09 AM ET566 Comments

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Summary

Yes, Social Security is dead broke.
But, no, it's not necessarily a good idea to take your retirement benefit early even if benefits will be cut in the future.
Filing for benefits before 70 could mean tens of thousands in lower lifetime benefits even assuming the 23 percent benefit cut starting in 2034 that Social Security is warning about.

Mark Hulbert's recent Market Watch column, It Might Be Better to Take Social Security at 66, Here's Why, suggests that taking Social Security at 70 might be a big mistake. The reason? Social Security is broke and Uncle Sam may cut benefits. He points out that in 2034, when the system's trust fund runs out of money, benefits will have to be cut by 23 percent absent payroll tax increases or other sources of additional Social Security finance.

Mark is right. Social Security is broke, indeed, it's dead broke. It's red ink totals $34 trillion -- twice the official debt reported by the Congressional Budget Office.

Hulbert concludes that taking benefits early, say at 66, makes more sense. I think this is bad advice for current and near-term retirees. Here's why.

First, Social Security remains the third rail of politics and any politician advocating direct benefit cuts will likely be committing political suicide. With the Democrats controlling and likely keeping the House for the next decade, the prospect for direct benefit cuts is remote. I'd expect the Democrats will raise Social Security benefit taxation, either directly or indirectly, but not cut benefits.

Second, it's extremely unlikely that benefit cuts would be visited on those already collecting benefits or on those about to start collecting in, say, the next decade. Roughly one fifth of the elderly subsists on Social Security and it's the main source of financial support for roughly half.

Third, calculations based on my company's MaximizeMySocialSecurity.com software suggest that even those facing a 23 percent benefit cut starting in 2034 could lose tens of thousands of dollars by filing before age 70 assuming collecting at age 70 would otherwise maximize their lifetime benefits.

I ran the case of a single man, named Dana, age 58. Dana started working at 22, earning $30,000. Over the years, Dana's earnings grew by 3 percent annually. Today he's making close to $85,000, which he expects to continue to earn through his planned retirement at age 65.

If Dana takes retirement benefits at 62, his lifetime benefits, measured (as of today) as a present value, will equal $818,747. They'll total $849,678 if he waits till he reaches full retirement age (FRA), which is ten months after turning 66. And if Dana waits till 70, his lifetime benefits will total $950,698. That's $131,951 more than taking benefits at 62 and $101,020 more than taking benefits at 66 and 10 months (full retirement age). Clearly, patience pays.

But what if benefits are cut 23 percent starting in 2034, including for Dana and others already collecting? In this case, the gains from waiting to 70 are smaller, but still significant. The present values of lifetime benefits from filing at 62, at FRA, and at age 70 are now $678,124, $700,084, and $764,084, respectively. Consequently, the gain from waiting from 62 to 70 is $85,960. The gain from waiting from 66 to 70 is $63,300. So if Dana goes beyond Mark's advice and files at 62, he'll lose $85,960. If he follows Mark's advice, he'll leave $63,300 on the table.

Mark sets up a different numerical example and reaches a very different conclusion. I'm not sure what he's doing under the hood. But I trust our tool, which has been repeatedly ranked the top Social Security tool on the web. It incorporates all benefit provisions and also lets you specify future benefit cuts and see how that affects your lifetime-benefit-maximizing decisions.

This article was written by

Laurence Kotlikoff

1.11K Followers

Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, Head of International Department for Fiscal Sustainability Studies, the Gaidar Institute, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Professor Kotlikoff is a NY Times Best Selling author and an active columnist. His columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications. In addition, he is a frequent guest on major television and radio stations. In 2014, he was named by The Economist as one of the world's 25 most influential economists. In 2015 he was name one of the 50 most influential people in Aging by Next Avenue. Professor Kotlikoff received his B.A. in Economics from the University of Pennsylvania in 1973 and his Ph.D. in Economics from Harvard University in 1977. From 1977 through 1983 he served on the faculties of economics of the University of California, Los Angeles and Yale University. In 1981-82 Professor Kotlikoff was a Senior Economist with the President's Council of Economic Advisers. Professor Kotlikoff is author or co-author of 19 books and hundreds of professional journal articles. His most recent book, Get What's Yours -- the Secrets of Maxing Out Your Social Security Benefits (co-authored with Philip Moeller and Paul Solman, Simon & Schuster) is a runaway New York Times Best Seller. His other recent books are The Clash of Generations (co-authored with Scott Burns, MIT Press), The Economic Consequences of the Vickers Commission (Civitas), Jimmy Stewart Is Dead (John Wiley & Sons), Spend ‘Til the End, (co-authored with Scott Burns, Simon & Schuster), The Healthcare Fix (MIT Press), The Coming Generational Storm (co-authored with Scott Burns, MIT Press), and Generational Policy (MIT Press). Through his company, Professor Kotlikoff has designed the nation's top-ranked personal financial planning software and Social Security lifetime benefit maximization software. Professor Kotlikoff has served as a consultant to the International Monetary Fund, the World Bank, the Harvard Institute for International Development, the Organization for Economic Cooperation and Development, the Swedish Ministry of Finance, the Norwegian Ministry of Finance, the Bank of Italy, the Bank of Japan, the Bank of England, the Government of Russia, the Government of Ukraine, the Government of Bolivia, the Government of Bulgaria, the Treasury of New Zealand, the Office of Management and Budget, the U.S. Department of Education, the U.S. Department of Labor, the Joint Committee on Taxation, The Commonwealth of Massachusetts, The American Council of Life Insurance, Merrill Lynch, Fidelity Investments, AT&T, AON Corp., and other major U.S. corporations. He has provided expert testimony on numerous occasions to committees of Congress including the Senate Finance Committee, the House Ways and Means Committee, and the Joint Economic Committee.

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