Since the government issued the first monthly Social Security check in 1940, the landscape of retirement funding in the U.S. has evolved dramatically. One of the most significant changes being the decline in employer-provided pensions. Instead, Americans are now largely responsible for their own retirement savings through personal investment accounts like 401(k)s and IRAs. In the midst of this shift, Social Security has become an increasingly vital source of income for retirees. According to a recent Gallup poll, nearly 60% of retirees rely on Social Security as a major part of their financial support during retirement, making it crucial for millions to optimize their benefits from the program.

This growing reliance on Social Security means that understanding its intricacies is more important than ever, especially since the system itself has not seen any substantial reforms since the 1980s. Fortunately, the system’s outdated structure has inadvertently created opportunities for beneficiaries to maximize their returns. By understanding these imbalances, retirees can position themselves to collect more from Social Security than they might have otherwise expected.

Social Security quirks beneficiaries should know about

Originally, Social Security was designed to provide about the same total payout in lifetime benefits, regardless of when a person began collecting. This concept was intended to ensure fairness, no matter whether someone claimed early or waited until a later age. In 1983, however, adjustments were made to reflect life expectancy projections at the time. This included changes to how monthly benefits increased for those who delayed claiming Social Security beyond the earliest eligibility age of 62. However, predicting life expectancy is no easy task, and the government’s estimates were not entirely accurate. Current life expectancy data from the CDC shows that retirees today can maximize their benefits by claiming at a specific age, a fact that wasn’t fully accounted for when the 1983 adjustments were made.

Social Security benefits are calculated based on a person’s primary insurance amount (PIA), which is determined by their earnings history. The age at which a person claims benefits, relative to their full retirement age (FRA), also plays a crucial role. For people born between 1943 and 1954, the FRA is set at 66. For those born after 1954, the FRA gradually increases, reaching 67 for individuals born in 1960 or later. The 1983 amendments also introduced adjustments to benefits for those who claim before or after reaching their full retirement age.

For example, individuals who choose to claim Social Security at age 62 will see a permanent reduction in their monthly benefits. On the other hand, delaying the claim until age 70 will result in the highest possible monthly payout. However, those who wait until age 70 must forgo receiving any benefits for several years and will need to live long enough to “catch up” to those who claimed earlier

To help individuals weigh their options, it’s useful to look at “breakeven” ages—the point at which someone who delayed claiming Social Security starts receiving more total benefits than if they had claimed earlier.

Data from the CDC offers some helpful insights into this calculation. The CDC’s life expectancy tables, updated in November 2023 based on 2022 data, provide estimates of how long retirees can expect to live. For instance, a 62-year-old retiree today can anticipate collecting more from Social Security over their lifetime by delaying their claim well beyond their full retirement age. By age 65, there’s an even stronger case for waiting, but once someone is approaching 70, it may make sense to consider claiming benefits slightly before reaching that milestone. According to the latest figures, the average 70-year-old has a life expectancy of around 85 years and four months. Based on this data, most people would maximize their lifetime benefits by claiming just before they turn 70.

It’s important to note that these life expectancy estimates are based on data from 2022, which still includes the impact of the COVID-19 pandemic. If we look back at 2019 data, the average life expectancy for a 70-year-old was nearly 86 years, and generally, life expectancy has tended to increase over time. That upward trend was part of the reason the 1983 Social Security reforms were enacted. Assuming life expectancies continue to rise, it reinforces the idea that delaying Social Security benefits until age 70 is likely the best strategy for most people, barring any concerns about a shorter-than-average lifespan.

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