AARP Eye Center
One of the most important financial decisions older Americans face is when to claim Social Security retirement benefits. Claiming earlier means receiving benefits longer, but that action will permanently reduce them, which can threaten financial health at older ages.
Despite changes in Social Security rules that place greater penalties on claiming at 62, almost a third of those eligible continue to claim at this age. What are the trends concerning this important life decision, and what is behind them? Recent AARP Public Policy Institute research provides some insights.
The Long-Term Trend: Fewer People are Claiming Social Security at 62
People entering their 60s today differ in several important ways from those a generation ago, and these differences have led to fewer people claiming at 62. First, on average they are more educated than earlier cohorts, and it has long been the case that people with higher education levels tend to claim later. Second, employer-provided defined benefit pensions, which provide a steady stream of payments, have largely been replaced by defined contribution plans. As a result, people now have to manage the risk of outliving their retirement savings. Third, thanks to a variety of factors including improved health, labor force participation among older workers has increased generally. Finally, legislated increases in the full retirement age have increased penalties for claiming at 62. Given these factors encouraging later Social Security claiming, it’s not surprising to see that while roughly half of those turning 62 in 1995-99 claimed at 62, the share had fallen to around 30 percent for those turning 62 in 2010-14.
Differences Between Those Who Claim at 62 and Those Who Don’t
Beyond these broader trends, who continues to claim at age 62? A recent report from the AARP Public Policy Institute written by Philip Armour and David Knapp of the RAND Corporation finds that where people live, especially for those in rural areas, plays an important role in claiming early.
Other factors associated with claiming at 62 include being unemployed, having a lower-paying job, working in a physically demanding job, or having a work-limiting health condition.
Although the data can show us who these early claimers are, we are left to make an educated guess as to why these groups are opting to draw Social Security benefits at 62. Naturally, the who and why overlap. Reasons behind claiming at 62 when one has lost a job are fairly obvious—the need for income. In addition, people who claim early often live in an area with fewer employment options (for example, rural areas may provide limited job availability for older workers). Finally, for many, with advancing age comes greater health challenges that limit the ability to do physically demanding work. However, even after accounting for many demographic and labor market related factors, much of the variation related to claiming is still unexplained.
Claiming Retirement Benefits at 62 Impacts Later Financial Security
To better understand the impact of claiming at 62, the researchers compared the outcomes of those who claim at 62 with people who have similar characteristics but who claimed after 62.
Armour and Knapp find age-62 claimants were substantially more likely to stop working at age 62, cash out their defined contribution plans, and begin receiving pension and annuity income if they had access to these sources of income. In short, people who claim at 62 often draw upon savings and other income sources to maintain their standard of living. However, they pay a significant price. Throughout their 60s and 70s they have household income consistently lower than people who wait to claim Social Security.
It’s Complicated—and Then There’s COVID
Deciding when to claim Social Security retirement benefits remains a difficult decision and depends on many factors. The findings in these reports indicate claiming at 62 is often associated with greater need for the steady income Social Security provides. But claiming early has a cost—a riskier financial future later in life.
Of course, unforeseen circumstances such as the COVID-19 pandemic impact the decision of when to claim benefits. Even while the U.S. economy recovers from the worst effects, it is likely some older workers, especially with limited incomes or declining health who lost their jobs and dropped out of the labor force as a result of the pandemic, will opt to claim earlier than they otherwise would have. Workers able to delay claiming by just one year can increase monthly benefits up to 8 percent.
Based on the results from these reports, early claiming brought on by the pandemic could threaten the retirement security of many older Americans. While current information does not yet show a dramatic shift to claiming benefits at 62, the picture could change as more data become available.