Employees Need Review of Social Security Strategies During Financial Crises

Research shows older employees may turn to Social Security for income following a financial crisis, but that can throw retirement planning off course.

The market downturn caused by COVID-19 is enough for some retirees and senior workers to hasten Social Security claiming. However, doing so comes with financial repercussions.

According to the Center for Retirement Research at Boston College, Social Security claims are filed more often during market downturns. Research conducted after the 2001 stock market crash and the 2008 Great Recession showed Baby Boomers often turned to Social Security for income, either because of the desperation they felt after losing a job or because of the sheer terror they felt in the markets. In 2009, 42.4% of 62-year-olds claimed their Social Security benefits, up from 37.6% in 2008.

Experts agree similar reactions are likely to occur during the coronavirus crisis, too. “People are going to need a consistent income source, especially with companies furloughing and laying off employees,” explains Matt Rutledge, a research fellow at the Center for Retirement Research at Boston College. “Even for those facing a temporary layoff, people are saying they need the money from somewhere.”

While retirees can begin claiming their Social Security benefits at age 62, it’s standard advice that they should delay tapping into Social Security until at least their full retirement age (FRA), when they can receive 100% of their earned benefits, or if possible, to age 70, when they can receive their highest benefit. FRA depends on a worker’s year of birth, but typically falls at age 66 or 67. Claiming ahead of this window leads to an automatic reduction in monthly benefits, and those who file at the earliest age of 62 run the risk of receiving the highest cut—30%. “This adjustment that people get for taking Social Security benefits later is more valuable than ever,” says Dave Evans, senior director at Team & Total Insurance Solutions. “That’s the paradox for these retirees, that their Social Security benefits are so valuable, but they need these benefits now more than ever.”

Ideally, these individuals would have access to other sources of income such as emergency savings accounts or, if a worker was laid off, unemployment insurance. In regard to the latter, workers can file for the two benefits simultaneously without affecting the Social Security earnings limit—which for those younger than FRA, runs up to $18,240 a year.

However, some may want to stall on claiming Social Security, Evans suggests. He notes that as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, workers who were furloughed or laid off are entitled to an additional $600 a week in unemployment insurance until July 31. Depending on what a worker’s bills and necessities look like, they may not have to tap into Social Security.  

Rethinking Decisions

Social Security is the largest source of retirement income for the majority of Americans. That is why understanding the benefit and having a personalized plan for claiming it is so important. Rash decisions in times of financial crisis can have a long-term effect on retirement security.

Fortunately, there’s a way employees who claim Social Security early can change their mind. Evans says employees have up to one year to withdraw their Social Security application with no interest, but can only do so once in their lifetime. Additionally, they will have to repay all the benefits they received. “Because an individual pays back the money, it’ll be as if he never took his benefits,” Evans explains.

However, if the individual misses the one-year window, he would have to wait until his FRA to suspend benefits. For example, Evans says, if an employee files for Social Security benefits at age 62 but his full retirement age is 66 and he wants to alter his benefits after the 12-month deadline, he would have to wait until age 66 to suspend benefits. “At that point, the system will recalculate the benefits at the full retirement age, and will recognize the years that the individual has deferred it. He will get a higher amount for those years that he suspended it,” Evans explains.

Aside from Social Security and unemployment insurance, individuals can apply for 401(k) loans or coronavirus-related distributions sanctioned by the CARES Act. Among those who immediately qualify for distributions are those who have been diagnosed with COVID-19 or have a spouse or dependent who tests positive for the virus. Individuals who are having trouble paying off bills because of reduced works hours or caregiving for children, or who are business owners who have had to shut down their business are also eligible.

While experts agree taking money from a retirement plan should be a last resort option, they are temporary solutions for those who have exhausted all other options, Rutledge says. “It might be the ideal time for some to use a [plan] loan, provided they pay it back,” he adds.

Before considering these options, and especially before claiming early Social Security, Evans suggests individuals run through various scenarios to understand their choices more clearly. On the Social Security Administration website, for example, workers can use the “my Social Security” feature and test their options to see if claiming the benefit early is the right option for them or if they can afford to wait a bit longer. “For many people, their biggest asset isn’t the value of their home or their 401(k) savings; it’s their present value of their Social Security benefits—something that could run into the millions,” he says.