High price to pay

Why taking Social Security early costs too much

The penalty for starting Social Security early is steep: Someone who applies this year at age 62 would see their monthly benefit check reduced by nearly 30%.

But with unemployment approaching Depression-era levels, claiming early may be the best of bad options for older people who can’t find a job.

The current formula doesn’t reflect gains in life expectancy, however, meaning early filers, who are disproportionately low-income, are hurt the most, says economist Alicia Munnell, director of the Center for Retirement Research at Boston

College.

➊ A ‘solution’ becomes a problem

Originally, Social Security had one retirement age: 65. In 1956, Congress authorized a reduced benefit for women, to allow them to retire at the same time as their typically older husbands. The reduced benefit option was extended to men in 1961.

As life expectancies rose, early filers wound up living with the penalty for longer. And in 1972, Social Security began offering a bonus for those who wait to file, which now adds 8% for each year you put off claiming.

Let’s say your full retirement age is 67 and your benefit, if started then, would be $1,000 a month. Starting at 62 would shrink the benefit to $700, while waiting until 70 to begin would boost the amount to

$1,240.

➋ Making benefits fairer

To restore actuarial fairness, the penalty for early filing should be lower, Munnell says. Someone who retires at 62 instead of 67 should get 22.5% less, rather than 30% less. Similarly, the bonus for waiting should be reduced to just below 7% per year.

Obviously, Social Security has bigger problems. Once its trust fund is depleted, as projected in 15 years or so, the system will be able to pay only 79% of promised benefits in 2035. That proportion is estimated to drop to 73% by 2094.

“I think there’ll be some grand bargain on Social Security at some point because I don’t think anybody’s really going to allow benefits to be cut 25%,” Munnell says. “This [actuarial fairness] probably should be put on the agenda.”