What should advisors tell a client who’s determined to take Social Security benefits early, at age 62, out of worry the program monies will be depleted?

Social Security Administration trustees have warned for years that the program will begin running out of money by 2034 if lawmakers don’t do something. Specifically, they would have to pass legislation that changes benefits, beneficiaries’ retirement age or the FICA taxes that employees and employers pay to fund the program.

But clients motivated by fear to take benefits early might wind up being hit with a double whammy, one that costs them 50% of their full retirement age benefits, according to one Social Security specialist—writer and speaker Mary Beth Franklin.

Franklin addressed the problem when she spoke to more than 350 financial advisors at Financial Advisor magazine’s Invest In Women 2024 conference in West Palm Beach, Fla., in March.

“The big elephant in the room for advisors is dealing with clients who think, ‘Hey, I think Social Security is going broke. Should I grab it now?’” Franklin said.

“What I usually tell clients is, if you need the money, go ahead and claim benefits. You might be able to reverse the decision if you have to. But if you don’t need the money and you’re claiming Social Security out of fear, it’s like selling stocks in a down market,” she said.

Advisors and their clients should realize that there’s a real cost in betting that Congress won’t act to shore up the funds, she said. “If you’re going to take benefits early, let’s say your full retirement age is 67 and you claim now at age 62. You’ll take a 30% cut,” Franklin explained. “And then your worst-case scenario happens and Congress does nothing, so benefits are cut another 20% on top of that. That would mean clients would be hit with a total 50% benefits haircut.”

Advisors, she said, should explain to clients that Social Security is not actually going bankrupt (contrary to what some news articles say about 2034). Social Security continues to be funded by the FICA taxes that we all pay. Up to about 2010, there was more than enough in these taxes to meet the program’s obligation, Franklin said.

“Only when the big financial crisis of 2010 hit and a lot of people lost their jobs and the first wave of boomers started to retire was there not enough money from FICA tax revenues alone to pay off benefits,” she said. “That’s when we started tapping interest on those $3 trillion trust funds. That was fine until about 2021, and the pandemic hit and a lot more people lost their jobs. Interest on the trust funds was not enough to pay benefits, and we actually had to start drawing down the funds themselves. And that’s what we’re doing now.”

If Congress does nothing between now and 2033 or 2034, the trust funds will run dry. What does that mean? There would only be enough FICA taxes coming in to fund about 80% of benefits, she said.

“Now, none of your clients are going to be real happy with the idea of being paid 80% of promised benefits,” Franklin acknowledged.

In reality, however, the odds that Congress will do nothing and allow benefits to be cut by 20% are highly unlikely, she added.

“Congress does not like to tick off old people, who vote in high numbers,” she said. By the time we get to 2037, we’ll have 70 million Social Security beneficiaries, and that could mean many ticked off seniors.

“Do you really think Congress will let there be a benefits cut across the board? I think it’s highly unlikely. They will step in, even if it’s at the last minute, like they did in 1983 when Social Security was in danger of not being able to pay full benefits. Social Security has never missed a payment in its nearly 90-year history,” she said.

Legislative changes, however, will have to be made going forward. “Possibly they’ll raise the full retirement age, but today’s 2-year-olds will live to 120. Possibly they’ll raise the income subject to FICA taxes or raise FICA taxes themselves. ... They could gradually increase the tax by one-tenth of 1% for 20 years,” Franklin said.

What investors should not do, unless they really need funds before full-retirement age, is lock in the potential for a haircut of 50% of Social Security benefits, she said. Advisors who can warn clients ahead of time about this risk will be adding tremendous value.

Taking benefits early will also mean that clients give up the 8% annual increase in benefits they can earn each year until age 70, Franklin said.