April 9, 2020
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.
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