The Consequences of Claiming Social Security Benefits at Age 62

As individuals approach their 60s, they face the important decision about when to start claiming Social Security retirement benefits. “The Consequences of Claiming Social Security Benefits at Age 62” by Philip Armour and David Knapp of the RAND Corporation asks what financial consequences the decision to collect early might have for the individual over time. A companion report, “The Changing Picture of Who Claims Social Security Early,” examines the characteristics of those who decide to start collecting at the early eligibility age (EEA) of 62 compared with those who wait. Importantly, that study suggests that employment losses resulting from the COVID-19 recession may lead to earlier claiming—in particular among those with less education and those living in more rural areas. As the current study shows, this could have significant implications for the financial security of a whole cohort of retirees in the coming decades given the penalties associated with early claiming.   

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Background

The Health and Retirement Study (HRS) is a panel survey that provides key data for this report. Started in 1992, it follows the same individuals over time and re-interviews them every two years. The survey responses allow for comparisons of retirement pathways for different cohorts of workers, from those born in the 1930s amidst the Great Depression, to Baby Boomers born in the early 1950s.

The Consequences of Claiming Early

From the early 1990s to 2010s, the fraction of individuals claiming Social Security retirement benefits at age 62 declined from over half of the eligible population to less than a third. This report examines both the short- and long-term consequences for that nearly one-third of people who still claim Social Security retirement benefits at the earliest possible age, despite a reduction in monthly benefits. To control for the many differences among claimers, this analysis uses a “nearest neighbor matching approach.” It matches married age-62 claimants with married later claimants who were otherwise similar at age 60, before they begin claiming their benefit, allowing a comparison of financial and well-being outcomes.

Key Findings

1. Age-62 claimants stop working earlier and cash out defined contribution plans sooner.
2. Age-62 claimants have lower household income throughout their 60s and 70s (on average, $10,000–$20,000 less in annual household income).
3. Age-62 claimants in their 70s have substantially less liquid wealth than do later claimants at similar ages (on average, 27 percent lower at age 74 and 43 percent lower at age 80).
4. Measures of financial hardship and mortality rates are not statistically or substantively different between the two claiming groups into their 70s.

The findings may actually underestimate the effects of claiming early. First, the benefits of delayed claiming grow substantially in claimants’ 80s, but available HRS data do not allow for such an analysis. Second, individuals in the 1990s or early 2000s faced a lower penalty for early claiming, which benefits them into their 70’s. Future research that follows these households into their 80s may uncover additional consequences of early claiming for financial wealth, responses to adverse health shocks, and well-being at advanced ages.

Notably, early claiming was not associated with a number of negative outcomes, including mortality and financial hardship measures such as skipping meals, taking on new debt or difficulty paying bills. This may reflect that personal preference for work and leisure are playing a critical role in claiming and retirement choices.

But perhaps the most important factor in deciding when to claim surrounds when one stops working, which can be a different age than when one claims Social Security benefits. Claiming at age 62 can be a vital source of support for individuals seeking to retire as early as possible but who lack the resources to do so; those who are already out of the labor force with limited income; or those who recently lost a job, had to take on caregiving responsibilities, or have an overly demanding job.

Read the companion report, “The Changing Picture of Who Claims Social Security Early.”