Bad Choice: Filing Early for Social Security Benefits

A growing number of older Americans are robbing Peter to pay Paul by filing early for Social Security Benefits.

New federal government data shows that applications for Social Security benefits are running well ahead of the rate expected due solely to aging of the population.

The most likely cause is the recession and layoffs of older workers who, in turn, decide to throw in the towel on work and retire earlier than planned.

Social Security benefits can be tapped at age 62, but filing before age 66 -- the so-called Normal Retirement Age (NRA)-- is considered early according to the government's definition.

Taking early benefits usually translates into a sharp reduction in lifetime Social Security payouts under the system's formulas, and a higher risk of poverty in old age.

For the fiscal year that began last October 1, applications for retired worker benefits are running about 9 percent higher than the rate attributable to normal demographic trends, according to a memorandum from Stephen C. Goss, chief actuary of the Social Security Administration (SSA).

"At this time, it is not possible to say what will happen for the rest of FY 2009," Goss said. "But it is likely that total retired worker benefit applications will turn out to be about 5 to 10 percent higher during fiscal 2009 than had been expected in the absence of a recession."

When you file for benefits early, the SSA reduces your benefit to avoid paying higher lifetime benefits to you than it does to someone who waits until their NRA is reached. Your lifetime benefits will be reduced for most of the years you start early, based on an actuarial projection of longevity.

Conversely, for every year you wait to file, Social Security adds 7 percent to 8 percent to your annual benefits.

And if you can delay taking benefits beyond the NRA, the difference is even greater. The SSA will bump up your payment an additional amount for every year you delay filing for benefits. The net effect: If you wait until you're 70, your annual benefit will be 32 percent higher than it would be if you started at age 66--and in addition to the 32 percent, you also get all the cost-of-living adjustments (COLA) from the intervening years.

You'll come out ahead so long as you -- or your spouse-- live past what's called the "break-even" age.

That's the age where the total benefits paid to the patient ones start exceeding total payouts to those who take early benefits. That age is around 80 -- and in the case of more than 80 percent of American couples, the husband or wife will live past that age.

If you're married, it's most beneficial for the higher-earning spouse to delay taking Social Security benefits.

Typically, that's going to be men. The men tend to die at younger ages; when that happens, a woman's Social Security benefit will be bumped up to the spouse's higher benefit.

For older women, that can be an important increase, since it's a time of life when overall income can decline sharply.

Social Security is the sole source of income for 42 percent of single women over the age of 62, and older single women fall into poverty at a higher rate than most demographic groups in the country. The poverty rate for elderly single women is 23 percent, compared with just 5 percent for married retired people.

The recent increase in early filings comes against a backdrop of deteriorating employment conditions for older workers. The jobless rate for workers over 55 has been lower than the national average--6.4 percent in April, compared with 8.9 percent overall. However, the length of joblessness is much higher than average for older workers. In April, unemployed workers over age 45 took an average of 22.2 weeks to find new work, compared with 16.2 weeks for younger workers, according to the U.S. Bureau of Labor Statistics.

And when older workers do land new jobs, they typically experience a steep drop in income and benefits. Research by The Urban Institute shows median wages for people who take new jobs in their 50s fall by a median of 57 percent, and 25 percent lose their health insurance.

Against those odds, early Social Security might seem like a logical step, and perhaps unavoidable. But it's a short-term fix that will erode retirement security over the longer haul.

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Recession Forces Bad Choice: Filing Early for Social Security Benefits