Your retirement standard of living could very well be worse if you claim your Social Security benefits at age 62.
That’s surprising because the Social Security Administration goes to great lengths to ensure that, regardless of when retirees claim their Social Security benefits, they will be no better or worse off. Those claiming at age 62 — “early claimers,” as they’re called — will receive more years of benefits than those who wait, but at a reduced rate. Assuming their life expectancy is equal to what the actuarial tables predict, the total benefits they receive in retirement will essentially be the same as if they had waited and received fewer years of higher monthly benefits.
A new study nevertheless finds that early claiming leads to a significant increase in the number of retirees living in poverty.
The study was recently circulated by the National Bureau of Economic Research: “Early Social Security Claiming and Old-Age Poverty,” by Gary Engelhardt, an economics professor at Syracuse University, Jonathan Gruber, an economics professor at MIT, and Anil Kumar, an economic policy adviser and senior economist at the Federal Reserve of Dallas.
Gruber, in an interview, stressed that their study does not mean that the Social Security Administration’s actuaries have made mistakes when calculating what benefit amounts should be associated with each age of claiming. On the contrary, he told me, “they do a pretty darn good job.”
Instead, he continued, their finding reflects the entirety of a retiree’s financial situation during retirement, of which Social Security benefits are just one part. And upon taking all income sources into account, they found that early claiming is associated with a greater probability of living below the poverty line.
Nevertheless, far more people claim their Social Security benefits at age 62 than at any other age, as you can see from the accompanying chart. More than a third of all retirees do so, in fact.
Gruber was careful to say that it’s not the case that each and every one of these retirees is being irrational. If your life expectancy is lower than the actuarial average, for example, then becoming an early claimer may very well be the right thing to do.
Furthermore, he added, it’s also possible that retirees are so much happier not to continue working that their leisure time more than compensates them for the increased odds of living in poverty.
Nevertheless, he added, he highly doubts that all of the early claimers are being rational. He suspects that many retirees subscribe to what he calls a “Homer Simpson” mind-set: “Woo-hoo, I can stop working, so I will.” In essence, they choose immediate gratification with little regard for the long-term consequences.
Another possibility for what’s going on, Gruber continued, is that retirees suffer from limited information. Without the necessary information, of course, and a huge amount is needed, it’s unrealistic to expect retirees to make good decisions.
Yet another alternative is that retirees are finding it difficult to go through the necessary calculations that would allow them to assess the relative merits of early or later claiming. Those calculations are quite complex, of course, which is why it’s crucial for retirees to engage the services of a qualified financial planner when making retirement decisions as momentous as when to begin claiming Social Security.
One straw in the wind that suggests these latter two possibilities are playing a particularly big role is that the researchers found that the biggest increase in early claimers living in poverty came at the bottom of the income distribution. It could very well be that such retirees are among those least likely to engage a retirement planner.
Regardless, this new study provides retirees with an object lesson in how retirement planning can all too easily become a triumph of hope over experience. Don’t try to do your retirement planning by yourself at home. This is one area in which professionals really can help.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.
