Delayed Benefits Could Expedite Social Security’s Financial Instability

A law passed in the last century threatens the long-term stability of Social Security.

A new study from the money management firm United Income points to more trouble for Social Security – and it is not the standard trouble.

Typically, voters think that “trouble” for Social Security means that it might run short of funds in 15 years or so, requiring seniors to take a 20% cut in benefits. This research suggests that things might be considerably worse.

The research measures the effectiveness of claiming strategies employed by seniors. It found that only 4% of retirees optimized their potential benefits from the program, costing current retirees a projected $3.4 trillion dollars in retirement income. That is an average loss of more than $110,000 per household.

While that might sound like bad news for existing retirees, it is actually much worse news for Social Security. The data suggest that Social Security could bleed billions of dollars more every year if seniors figure out how the system works. Specifically, the data show that almost all households are able to improve their overall benefit level. Moreover, the size of the potential gains indicates that retirees do not have to be perfect to hurt the program.

To illustrate, if seniors are able to add $10,000 to their lifetime benefits, the program would bleed more than $20 billion per year. Of course, the $10,000 figure is a discussion point, a random number that is less than $110,000, that is intended to shed light on the risks involved with seniors shifting their claiming patterns.

While most academic research (Shoven/SlavovHeiland/Yin ) shows that claiming benefits later will create larger benefit expenses for Social Security, those costs might be offset somewhat by seniors who continue to work, but I haven’t found much conclusive evidence to suggest that people are working past 66 to finance their delayed benefits.

A lot the projected risk for Social Security stems from delayed benefit claiming after the normal retirement age. Currently, the program’s rules allow Americans to start collecting benefits at any time between 62 and 70. The longer one waits, the bigger the check is when the money starts to flow. While seniors get larger checks, the overall impact of the delay is supposed to be a zero-sum game where the increase in the payment offsets the fewer number of checks.

This new research in fact casts a lot of doubt on that assertion. In fact, it suggests that if seniors “optimize” their benefit claiming date, the finances of Social Security would likely deteriorate faster. Given that the rate of seniors who claim at 70 has tripled over the last 10 years, it is more than likely that delayed benefit claiming is already pushing Social Security to insolvency faster.

This possibility is apt to be hard for policy makers to digest because these costs last for decades. Statistically speaking, every senior who defers his benefit checks since 2018 should fully expect that he is trading full checks for ones that are subject to the limitations of solvency. In the case of someone like the First Lady, those statistics suggest that the bonus might last another 40 years. 

So, the program is apt to have a lasting conflict over how to fulfill these obligations. Take the SSA’s outlook on life expectancy: roughly half of seniors who file at 70 over the course of 2019 will be alive in 2035 when in theory Social Security runs short of money. If the future follows the forecast, policy makers will face a difficult choice: the only way to fulfill these super-sized checks is to pass along even greater reductions to every other senior. So, we are positioning the program for another set of ‘notch babies.’

If this outcome sounds unpleasant, it is far from the worst-case scenario. In this exchange for delayed benefits, Social Security takes on leveraged tail risk. That is all of the costs that will materialize if science alters the mortality tables – say someone finds a cure for cancer. 

To illustrate this possibility, General Electric took a $15 billion charge this year to cover 300,000 long-term healthcare policies issued more than a decade ago. These contracts are monitored by professional risk managers, who evaluate the exposure and periodically adjust prices on a weekly or monthly bias. Yet, the company has lost roughly $50,000 per contract because the actuaries failed to foresee the growth in healthcare costs. The price for longevity risk provided by Social Security was set in 1983.

Typically, we hear that Social Security wasn’t structured for the present demographic. The fact is that no number of people can overcome the ability of politics to promise what it can’t deliver.

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About the Author

Brenton Smith (A.K.A. Joe The Economist) writes nationally on the issue of Social Security reform with work appearing in Forbes,, MarketWatch,, and regional media like The Denver Post.