Why people end up collecting Social Security benefits too early

Call to readers: Select is looking for retirees to talk about how they decided when to collect their Social Security benefits. If you're interested in sharing your Social Security story, email trina.paul@nbcuni.com.

Figuring out when to collect your Social Security benefits is a personal decision. You'll want to account for factors like your current health status, spouse and additional sources of retirement income. Retirees are susceptible to making the same critical mistake: collecting benefits too early and underestimating how long they'll live.

How much you earn from Social Security depends on when you choose to collect. Full retirement age ranges from ages 66 to 67. While retirees are technically able to start collecting reduced benefits at age 62, individuals (with a full retirement age of 67) who start collecting at age 62 will experience a 30% reduction in the value of their monthly lifetime benefits.

There's also an additional incentive for retirees to delay collecting benefits past their full retirement age. For every year beyond full retirement age, retirees' benefits will increase by 8% until they reach the age of 70, meaning retirees with a full retirement age of 67 could see their monthly social security check increase by up to 24% if they wait three years to collect.

The problem is most people aren't waiting that long. In 2019, only 15% of new worker beneficiaries were over the age of 66, while 25% were 66, according to the Congressional Research Service. Another 33% began collecting benefits at 62, while 60% started doing so under the age of 66.

Laurence Kotlikoff, author of Money Magic and professor of economics at Boston University, believes that the major Social Security mistake people make is collecting retirement benefits too early.

"About 85% of people should wait until 70 to take retirement benefits and only about 6% are. They [retirees] are leaving tons of money on the table and they're doing so because they're thinking about life expectancy and not their maximum age of life," says Kotlikoff. 

If waiting a few years to collect Social Security benefits could mean earning thousands of dollars more over the course of retirement, why are people so eager to apply for benefits before they reach their full retirement age?

Select spoke with Suzanne Shu, professor of marketing at Cornell University, about some of the psychological reasons behind why people sometimes collect Social Security benefits too early.

One of the primary reasons people choose to collect their benefits too soon is because they misunderstand how the program works, according to Shu.

The Social Security administration calculates benefits based on an individual's 35 highest earning years. The program is funded by current workers through the payroll tax, which is 6.2% on up to $147,000 in earnings per employee.

"It's almost as if they [retirees] are thinking about it [Social Security] as a defined contribution plan or 401(k)," says Shu. "The stronger that people feel that sense of ownership, the more that they want to claim early." 

A person's sense of ownership over their benefits and loss aversion — the idea that people are more sensitive to losses than they are to gains of the same amount — both play a role in their decision to collect early, according to Shu.

In other words, people feel Social Security benefits belong to them because they've spent their entire lives paying into the system, says Shu. Many believe that by not collecting early, they'll lose out on benefits because they assume they'll die earlier than they actually will.

Shu says impatience also plays a role in one's decision to collect benefits too soon — just as people tend to value the immediate satisfaction of not going to the gym today and postponing that visit until tomorrow, they don't often think about the long-term implications of collecting early. 

And of course, life expectancy plays a part. Even people who should expect longer lifespans tend to underestimate how long they'll live, explains Shu.

According to the Social Security Administration, on average, a 65-year-old male in 2022 can expect to live until age 84.1, while a 65-year-old woman can expect to live until age 86.7.

"Let's say that they have been working for about 30 years. It's not inconceivable that they will have another 30 years ahead of them in retirement," says Shu. "So if you think about all of those years in retirement as close to the number of years that you spent in the workforce, it starts to change how much of a rush you are to claim your benefits."

Shu doesn't offer a blanket directive to delay collecting benefits because everyone's circumstances are different. However, she does recommend that people make a list of reasons why postponing benefits would be better than collecting early. 

And this idea is backed by research. In a 2015 study, participants were split into two groups. The first group was asked to think about reasons for favoring early claiming, then reasons for favoring delaying claiming, while the second group was asked to consider the same points in the reverse order. 

On average, those in the second group chose to postpone their preferred claiming age by 9.4 months, because they were encouraged to think about the future first and had considered the advantages of waiting to collect.

It could also be useful to think about how much more money you earn by postponing benefit collection, especially if you end up living into your 80s or 90s, says Shu. People don't typically think about the regret they'll feel if they collect early and lock in a lower monthly payment.

And when prepping for retirement, people should also consider that Social Security benefits don't typically provide enough money to cover all of retirees' living expenses. 

According to the Center on Budget and Policy Priorities, for someone who worked for all of their adult life at average earnings — and retires at age 65 in 2022 — Social Security benefits only replace about 37% of past earnings. In other words, it's essential to have other retirement savings to draw on, whether that's from a Roth IRA, a traditional IRA or a 401(k) plan.

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Most people are susceptible to common ways of thinking — being impatient, averse to losses or having a strong sense of ownership — which, in turn, influence how we make important financial decisions. Retirees can try to avoid these common pitfalls by making a list of reasons in favor of delaying receiving social security benefits, considering life expectancies and reminding themselves of the regret they might feel if they're locked into a lower monthly benefit well into old age.

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