Retirees will collectively lose $3.4 trillion (that’s trillion with a “T”) in potential income that they could spend during their retirement because they claimed Social Security at a financially sub-optimal time, or an average of $111,000 per household.
This was among the more jarring statistics from a report from United Income, a money management firm that provides financial advice to retirees, about how much retirees would gain by improving Social Security decisions.
The average Social Security recipient would receive 9% more income in retirement if they made the financially optimal decision about when to claim this retirement benefit, the report found.
Current retirees will collectively lose an estimated $2.1 trillion in wealth because they made the sub-optimal decision about when to claim Social Security, or an average of $68,000 per household.
Most retirees will in fact lose wealth in their 60s and early 70s if they choose to optimize Social Security, but will be wealthier in their late 70s through the rest of their lives, the report points out.
Key findings
Here are some additional key findings from the report, “The Retirement Solution Hiding in Plain Sight: How much retirees would gain by improving Social Security decisions.”
- Only 4% of retirees are able to make the financially optimal decision about when to claim Social Security.
- 57% of retirees would build more wealth through their life if they waited to claim until they were 70 years old (when only 4% of retirees currently claim), while only 6.5% of retirees would have more wealth if they claimed prior to turning 64 (when over 70% of retirees currently claim benefits).
- 21% of those at risk of not affording retirement (or having enough income to cover their expected cost of living) would see an improvement in their chances if they claimed Social Security at the optimal time. Among those retirees at risk that start with a greater than 10% chance of affording retirement, 95% see their chances of affording retirement improve by an average of 28%.
- Elderly poverty could be cut by nearly 50% if all retirees claimed Social Security at the financially optimal time. In particular, about 13% of people over the age of 70 are expected to live in poverty at some point, which is estimated to fall to 7% if retirees had claimed Social Security at the optimal time—a rate that could potentially fall even further if they earned additional income while they waited to claim Social Security.
Policy intervention needed
The report was authored by Matt Fellowes, United Income, former Fellow at the Brookings Institution; Jason J. Fichtner, Johns Hopkins University, former Chief Economist at the Social Security Administration; Lincoln Plews, United Income; and Kevin Whitman, former Policy Research Director at the Social Security Administration.
The authors note it is troubling that nearly no retirees are making the financially optimal decision about Social Security, and that the costs of those mistakes are high for retiring households, particularly those at risk of not being able to afford retirement.
“In addition, since making the optimal decision means sacrificing wealth in the near-term, we think it is unlikely more people will make the right decision without a policy intervention,” the authors point out. “Retirees face a strong near-term disincentive to make the financially optimal decision, since their wealth will fall before it gains in value. This is exactly the type of market failure that public policy can effectively address.”
Among the topics for consideration should be the eligibility age range rules, which were last materially modified in 1983.
Since 92% of retirees are expected to be better off waiting to claim until at least their 65th birthday, claiming before should ideally be an exception for those who demonstrably need to claim benefits before the full retirement age. Means-testing rules may be one way to address this, though an easier place to start would be to change how the Social Security Administration frames claiming age options to the public.
Instead of portraying age 62 as the “early eligibility age,” for instance, claiming at age 62 could instead be labeled as the “minimum benefit age” while age 70 could be labeled as the “maximum benefit age.”
The Social Security Administration could also be provided with resources to improve utilization of the policy it administers, perhaps in partnership with third-party fiduciaries. With the potential to put $2.1 trillion wealth and $3.4 trillion in income in the pockets of retirees, policymakers should be focused on improving this program, the authors conclude.
The Social Security Administration now pays over $1 trillion in benefits to more than 65 million people annually, or about nine out of every 10 retirees. Now accounting for about one-third of all income annually earned by U.S. retirees, these retirement-focused benefits are fundamental to the financial security of most retirees.
About 50% of current retirees report that more than half of their annual income comes from Social Security, while 28% report that more than three-quarters of their income comes from these benefits.