Most Americans don't claim Social Security at their optimal age: Study

Bipartisan Policy Center Director of Economic Policy Shai Akabas joins Yahoo Finance’s Zack Guzman to discuss BPC's new report titled "Helping Americans Claim Social Security at the Right Age."

Video Transcript

ZACK GUZMAN: Meantime, though, want to highlight a discussion to be had here in focusing in on Social Security. Of course, it's out there for Americans entering retirement there to tap. But checks beginning any time between the ages of 62 and 70. But electing when to start receiving those benefits is far from simple. If you claim too early, the checks are going to be smaller for the rest of your life. But you wait a bit, you receive each month a little bit more but have fewer years to reap that reward, potentially, perhaps.

It's no surprise that only about 4% of Americans are timing that decision right to tap Social Security at the right time according to new research on best practices from the Bipartisan Policy Center. And joining us now for more on that is the director of Economic Policy at the Bipartisan Policy Center. Shai Akabas joins us now.

And Shai, when we looked at it, 4% of Americans doing something right is not very good. We'll just call that frank. So what's the biggest mistake that you see around planning to tap Social Security? And what should Americans know about?

SHAI AKABAS: Yeah, Social Security is critical to most people's retirement planning. For about half of older Americans, it represents the majority of their income in retirement. And the size of that income stream really comes down to one primary decision-- when are you going to claim your benefits? That decision really matters.

Most people know that, as you said, 62 is the earliest age that you can claim. But what a lot of people don't understand is that when you wait, those higher benefit levels are locked in for life. If you wait until age 67, you would get more than 40% more than you get at age 62 per month. And if you wait till age 70, it can be over 75% higher.

So as an example, if your benefit at age 62 is $1,000, that would mean your benefit at age 67 is more than $1,400. And at age 70, it could be nearly $1,800 a month. So that's a huge difference. It's concerning that, thus, that age 62 remains the most common claiming age and that the significant majority continue to claim before their full retirement age.

Many of these people are not getting as much out of the program as they could be. So our paper finds that most people are provided with the right timely information to help them make this critical decision and if this is really an overlooked area of public policy where we could be doing more to help Americans improve their retirement security.

ZACK GUZMAN: Yeah, it's kind of a tough one too, though, right, because no one really knows how long they're going to live. But people also tend to underestimate how long that actually will be when you think about improving lifetime spans here in the US. And, overall, I mean, the most common age, as you said, to claim 62 even though people plan to claim much later.

So what are you seeing, I guess, in that mismatch between best played plans of mice and men and then, you know, not following up on those plans to see people claiming so early? Why do you think that is?

SHAI AKABAS: It's a great question. There's a variety of reasons why people claim when they do. And, frankly, some of the reasons why people claim early at age 62 or thereabouts are really justified-- you know, people who have lost their job. And in the current crisis, we're certainly going to see more of that, especially as unemployment benefits, the expansion runs out. And people are looking for places where they can get financial security.

And oftentimes, people have medical emergencies that are unavoidable. And they need that source of income. But oftentimes for Americans, it's the fact that they don't have that full understanding of the program. And it's a complicated program. There's a lot of rules, a lot of things to know. But the government doesn't really do a great job of helping people frame the decision in a way that helps them understand the benefits to claim later.

So, for example, a lot of people don't know that if you wait to claim your benefits, that could not only mean higher benefits for you, but it could mean higher benefits for your spouse if they outlive you, because their benefit is going to be determined by the age at which you claim. There's a lot of things going on at here. But there are factors that people are not taking into consideration when they make this decision that we can do a better job of helping to communicate to them.

ZACK GUZMAN: Yeah, those are pretty interesting findings from the report for me too, just trying to figure out what the best strategies might be for spouses looking at this too, as, you know, a lot of widows out there might be impacted by when a spouse chooses to tap benefits here as well. When we back up and think about I guess the other dynamic here for younger Americans maybe planning or not planning to get Social Security since we know funding is obviously something that's always a concern.

And right now, a little bit of a growing concern here when we think about funding it, as President Trump talks about deferring payroll taxes there. A new look at that approach is hinting that it might speed up the timeline here when those funds get exhausted when you think about what it might mean.

We looked into that. And the new report there, the chief actuary of Social Security saying that it could exhaust the funds for Social Security by 2023 if those are made permanent, those payroll tax cuts. So what's your take on that and what it might mean for maybe people saying, look, I don't think Social Security going to be there for me? We hope that's not the case. But what's your take on maybe the plans that President Trump has here?

SHAI AKABAS: Sure, so Social Security is clearly on an unsustainable path right now. Its finances are not going to last more than another 10 or 15 years in order to pay out full benefits. If nothing is done at some point, benefits would face an across-the-board haircut. It's important to note, though, that benefits will not disappear entirely. So there would still be something like 3/4 of benefits paid out.

And I frankly don't think Congress is going to let that happen. What the report showed that you're talking about is that if you entirely eliminated Social Security's main source of funding, the payroll tax, then the trust funds would be exhausted much, much earlier as soon as a couple of years from now. And that makes sense. If you eliminate the program's funding source, there's not going to be funding for the program.

What I think is even more concerning, the focus on though is that even without a proposal like that, just on the current track and with the impact of the coronavirus and the economic fallout with people not on payrolls and, thus, not paying payroll taxes if they don't have a job, we did a report that showed that we're likely to see the exhaustion of the old age trust fund, the main Social Security trust fund within probably 10, 12 years from now, anyway, a little sooner than was expected.

That's something that really should be concerning to all Americans. And they should be calling on their members to make reforms to the program to make it more sustainable. But final point. That should not impact when people claim their benefits. Those, whether it's an across-the-board cut or whether it's policy proposals that go into place, those are going to affect everyone equally. So people still need to be making their claiming decision based on what's best for them and their family's circumstances.

ZACK GUZMAN: Yeah, I know very important reminders. And, again, always worth stressing that if you can stomach to wait, clearly the dividends there will pay out in the long run. But Shai Akabas, director of Economic Policy at the Bipartisan Policy Center-- appreciate you taking the time to chat.

SHAI AKABAS: Thanks again for having me, Zack.