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Behavior

Social Security Tapped More in Downturn

It happened after the 2001 and 2008-2009 recessions, and it will happen again. Some older workers who lose their jobs will turn, in desperation, to a ready source of cash: Social Security.

In the wake of a stock market crash like the one we just experienced, baby boomers’ first inclination will be to remain employed a few more years to make up some of the investment losses in their 401(k)s. But as the economy slows and layoffs mount, that may not be an option for many of the unemployed boomers, who will need to get income wherever they can find it.

Age 62 is the earliest that Social Security allows workers to start their retirement benefits. In 2009, one year after the stock market plummeted, 42.4 percent of 62-year-olds signed up for their benefits, up sharply from 37.6 percent in 2008, according to the Center for Retirement Research (CRR).

Social Security is a critical source of income even in good times. One out of two retirees receives half of their income from the program, and they can also count on it when times get tough.

But the financial cost of starting Social Security prematurely is steep, because it locks in a smaller monthly benefit for the rest of the retiree’s life. For those who can wait, the size of the monthly check increases an average 7 percent to 8 percent per year for each year claiming is delayed up until age 70.

Unfortunately, the people who claimed Social Security early in the wake of the 2001 recession had fewer financial resources to begin with – namely, their earnings were lower, they had less wealth, and they were less likely to have a spouse to fall back on – according to the CRR study.

“These simple characteristics suggest that those hardest hit by recessions are most likely to use Social Security as an income-insurance policy,” the researchers concluded.

As the economy recovered, workers stopped grabbing their benefits early, and the longer-term trend of a falling share of 62-year-olds claiming Social Security resumed.

This time around, the depth and duration of the expected recession will determine how many older workers will claim their Social Security early. The Great Recession increased the share of early claimers much more than the milder recession of 2001-2003, the CRR study found.

A Federal Reserve official has predicted the unemployment rate could reach levels rivaling the Depression. Like the U.S. economy, older workers are entering uncharted territory.

Read more blog posts in our ongoing coverage of COVID-19.

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10 Responses to Social Security Tapped More in Downturn

  1. Tony says:

    If workers claimed early in 2009 to preserve their financial wealth, with hindsight they probably did the right thing, given the subsequent up in the stock market. But one fears that many of the 2009 claimers had little financial wealth, and claimed not to preserve their financial wealth, but because they were out of a job and needed to eat.

  2. Brenda Lamb says:

    Informative article. Thank you for sharing!

  3. Geoffrey Hewitt says:

    There is an extreme need to teach high school level simple investing techniques, which would help many young people understand how important it is to learn about savings and long term growth returns. What is idiotic is that if it was a requirement for high school graduation, it would help millions in poverty before retirement and save trillions in federal programs.

    • Scott says:

      I’m not so sure about that; there’s little evidence that financial education intervention has any effect at all. The inclination to save is behavioral, and behavioral change is hard. It requires coaching more than education.

    • CAB says:

      I agree. Iowa requires high school students to take a semester class on personal finance. It should have been required years ago.

    • Ellis says:

      Especially important in teaching high schoolers or college-agers is the effect of compounding interest. A small amount beginning to be saved early grows by the magic of compounding far better than large amounts saved beginning much later in life.

      I tell this to young people, and they just don’t seem to get it.

  4. Miami Sid says:

    If anything this virus crisis should be an object lesson about why it is important to wait until you are 70 to collect.

  5. Jennafer N Goodwin says:

    Is it true that people on social security have to file tax returns to get the stimulus check? I don’t file tax returns because I have low income.

  6. Lee Cooper says:

    Claiming early may be the right decision if you need the money now. The SSA has made calculations that we will get the same total $$$ over our lifetime (depending how long one lives of course) whether we take at 62 or 70. Generally the break even age is around 76 or so.
    If you manage to live longer it will pay to have waited until after 62.
    Do your homework, do the math to see when may be the right time.

  7. Jan says:

    What will the lack of putting money into SS by the generation that is now unemployed do to the system? How long can the system afford to lose these contributions.

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