Should You Take Social Security Early Before It Runs Out of Money?

Tens of millions of Americans rely on Social Security for a huge portion of their income in retirement. Millions more expect Social Security to be there in the future when they need it, either for retirement benefits at the end of their careers or for disability benefits if something happens to them before then.

Yet the financial news from Social Security has been dire for a long time. Based on demographic trends and the rising number of retirees making claims on the program, Social Security’s trust funds are expected to run out of reserves sometime in the mid-2030s. That gives lawmakers only about a dozen years to figure out what they’re going to do about the potential financial shortfall in the program.

If Washington does nothing, the revenue Social Security gets will be enough to pay only around 80% of current benefit entitlements. Based on the possibility of that 20% haircut in the future, some people are changing their minds about waiting longer to take Social Security, instead figuring they should get what they can before cuts affect their monthly checks.

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However, as you’ll see below, there are a couple of reasons to expect a better outcome. That’s why I don’t typically recommend that anyone adjust their decision about when to claim Social Security based solely on the financial conditions of its trust funds.

1. Lawmakers figured it out before

The last time Social Security had a major financial crisis was in the early 1980s. Immediately before then, high levels of inflation and relatively low wages combined to put new financial stress on the program, as benefits increased in line with prices, but revenue from payroll taxes failed to keep up.

Congress and the White House were controlled by different political parties, but lawmakers still found ways to address the problems that endangered the system. In the end, new taxation on benefits for those earnings above certain income thresholds, along with a gradual increase in the full retirement age from 65 to 67 for future recipients, helped to cushion the blow and buy time for the program.

Similar adjustments would be possible now and would address the coming financial problems for Social Security. A combination of payroll tax increases, alternative inflation metrics, and possible retirement age increases could bridge the gap between program revenue and outlays.

2. Washington won’t have the stomach for outright cuts

From a more cynical point of view, the bearish case for Social Security relies on the idea that if the Social Security trust funds ran out of money, the government would simply let automatic benefit cuts take effect. That might technically be what the laws governing Social Security would call for, but it’s highly unlikely to happen as a practical matter.

Already, older Americans tend to wield their political power to a greater extent than younger voters. The outcry from a huge portion of the American public over benefit cuts would be so great that anyone who failed to support covering the shortfall in benefits would likely lose their next election.

In comparison to multitrillion-dollar deficits that the federal government has run in the past couple of years, the annual outlay needed to cover the missing revenue from Social Security payroll taxes and other sources would be manageable. It’s therefore likely that if Washington can’t come up with any better solution, it will simply draw money from the general fund rather than relying solely on payroll taxes and other dedicated sources of funding for Social Security.

Don’t lose your nerve

With the threat of Social Security cuts likely overstated, there’s good reason simply to follow your optimal strategy for claiming benefits. For some, that will mean waiting longer before claiming benefits, in the hopes of receiving higher monthly checks long enough to come out ahead. For others, claiming at full retirement age or before will make more sense.

Regardless, though, trying to anticipate the future of Social Security is unlikely to get you a better result. You’re better off working through the scenarios that are most likely and then coming up with a game plan that’s flexible enough to deal with whatever comes your way.

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