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

by: Laurence Kotlikoff

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 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.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.