Don’t be afraid of this Social Security mistake


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Editor’s Note: This story originally appeared on SmartAsset.com.

The Social Security Board of Trustees announced last month that the trust fund partially responsible for paying benefits is set to run out by 2033, which could lead some retirees to worry that their monthly benefits may run out before they die.

However, a study by the Center for Retirement Research at Boston College explains why it’s important to read beyond the headlines and understand how Social Security is funded.

Misinterpretation of the news could lead some workers to claim their benefits early and potentially forfeit larger payments later.

How media coverage can affect your plans

Social Security payment
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The Center for Retirement Research (CRR) at Boston College conducted an online survey of more than 3,100 participants who were presented with a news article about the long-term funding challenges of Social Security.

The article was based on the 2020 Social Security Trustees Report, which predicted that the trust would be depleted by 2034, at which point ongoing payroll taxes would continue to cover about 75% of benefits. The trustees have since revised that forecast in their 2021 report, saying the trust will run out of money by 2033.

All study participants were given the same article to read – but with four possible titles. The headline given to the control group simply read: “Social Security faces a long-term funding shortfall.” The other three headlines specifically highlighted the potential depletion of the trust fund:

  • “The Social Security Trust Fund Will Exhaust Its Reserves In 2034”
  • Social Security Fund heads for bankruptcy in 2034, Trustees Find
  • Projected revenue to cover only 75% of scheduled Social Security benefits after 2034

Each participant then answered a series of questions, including when the person plans to start collecting Social Security and how much they expect to receive. Those who saw one of the three headlines that the Social Security Fund was depleting on average said they plan to claim their benefits about one year earlier than the control group (66).

Meanwhile, about 20% of all respondents said they do not expect to receive any benefits at all. About 34% expect full or nearly full benefits, while the remaining respondents expect their benefits to be somewhere in the middle.

The study found that those who earned Title IV, which indicated that 75% of benefits would still be funded if and when the trust would run out, were more realistic about the future of Social Security.

Claiming early means lower monthly payments

Uncle Sam cuts Social Security benefits
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Why is this important? The CRR notes that if workers follow their intent to claim benefits early, they will receive lower monthly payments.

Written by Laura D.

However, adjusting the narrative to include current revenue may not be enough to prevent workers from claiming early. If future beneficiaries follow through with their intention to claim in the previous year, they will receive lower monthly benefits without increased savings to make up the gap.”

For example, a 50-year-old who earns $75,000 a year will collect $35,229 a year if he claims Social Security at age 65. If he defers Social Security for only one year and starts collecting at age 66, the same man will collect an additional $2,747 annually, according to SmartAsset’s Social Security Calculator.

Then again, claiming Social Security benefits earlier isn’t always wrong. File waiting may not be an option based on a person’s financial situation, retirement income, and other factors, including health and life expectancy.

For example, the man in the above example would have to live to be 79 to recoup the benefits he would have received at age 65.

What is the future of Social Security?

Lock on social security cards
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The CRR study shows that Social Security media coverage can not only inform a person’s understanding of the safety net, but also influence how and when a person plans to claim their benefits.

While the trust is expected to be depleted in the next 12 years, that doesn’t mean the Social Security system will inevitably fail. When Congress has faced similar long-term funding challenges in the past, it has acted.

In 1975, the Trustees issued a report predicting that the Old Age and Residual Insurance (OASI) and Disability Insurance (DI) would run out of money by 1979.

As a result, Congress passed the 1977 Social Security Amendments, which raised the payroll tax from 6.45% to 7.65% and lowered benefits slightly to ensure the stability of money over the next 50 years.

However, short-term financing challenges remained in the 1980s, which led to further amendments in 1983, including taxation of benefits and an increase in the retirement age.

“Troublemakers who claim that Social Security will not exist when young workers retire today are either misunderstanding or misrepresenting expectations,” according to the Center on Budget and Policy Priorities, a progressive think tank.

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Old people are happy with money
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When planning Social Security, it’s important to understand that the program is funded by ongoing tax collection, as well as an existing trust fund.

The CRR study shows that media coverage of a trust’s future can influence when people plan to start claiming their benefits. While the OASI trust fund is expected to deplete by 2033 under current conditions, Congress has worked to secure the program’s future before when faced with similar challenges.

A financial advisor can help you plan for retirement and decide when to start collecting Social Security. Find a consultant now.

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