Government Data Points to a Big Imbalance in Social Security Payouts. Here's How You Can Take Advantage.

A lot has changed since the government put the first monthly Social Security check in the mail in 1940.

Most Americans no longer receive a pension from work. They fund their own retirement savings through personal accounts like the 401(k) and IRA. And more and more people have come to rely on Social Security to make ends meet in retirement as well.

Nearly 60% of retirees say Social Security is a major source of income in retirement, according to an annual Gallup poll, so making the most out it is essential to millions of Americans.

That means navigating the details of a program that hasn't been meaningfully overhauled since the 1980s.

The good news is that since the system is based on older data about retirees, it's created some imbalances in the program over time. The government even has the data to prove Social Security no longer works the way it was originally designed. And you can set yourself up to take advantage of that imbalance to collect more from the program. Here's how.

Image source: Getty Images.

Why Social Security no longer works as originally designed

You can claim Social Security retirement benefits starting at age 62. If you're still working or plan to live off your savings in early retirement, you don't have to claim right away. In exchange, the government will increase your benefit by a small amount for every month you forgo claiming Social Security. Those increases cap out at age 70.

Social Security was originally designed to pay approximately the same amount in lifetime benefits no matter what age you claim. It was updated in 1983 to change how much those monthly adjustments were at various ages based on life expectancies at the time and projections for future life expectancies.

Of course, it's difficult to make such projections, and it's no surprise the government didn't get the numbers exactly right.

The current CDC longevity expectations give a clear indication that retirees can maximize their lifetime benefit by claiming at one specific age.

The numbers every retiree needs to know

Maximizing your lifetime Social Security benefit hinges on one very important number: How long do you expect to live?

The way Social Security calculates your monthly benefit is based on your primary insurance amount and when you claim relative to your full retirement age. It uses your earnings history and a simple formula to determine your primary insurance amount.

Your full retirement age is determined by the Social Security amendment passed in 1983. The new law set the full retirement age at 66 for anyone born between 1943 and 1954. It then increases two months for every year someone is born after 1954 until reaching 67 for those born in 1960 or later. That amendment also changed the monthly adjustments for claiming before or after your full retirement age.

Here's how your monthly benefit changes based on claiming age assuming you have a full retirement age of 67.

Data source: Social Security Administration.

Claiming early permanently reduces your monthly benefit. On the plus side, you receive more monthly checks over your lifetime.

Those who wait until age 70 get the biggest monthly check, but they don't receive a dime from age 62 to age 69 and 11 months. As a result, they have to play catch-up with those who claimed benefits earlier. But if they live long enough, they can collect much more in lifetime benefits than someone who claimed earlier and lives to the same age.

How long do you have to live to make it worth the wait?

The following table shows the breakeven ages for various claiming decisions for someone with a full retirement age of 67. Living past the breakeven age means it's a good decision to delay benefits.

Data source: author.

The longer you delay benefits, the longer you have to live to maximize your lifetime Social Security income. Every month you don't collect a Social Security check adds a little more time to the breakeven age.

Here's what the government data says

The CDC released an update to its life expectancy tables in Nov. 2023 based on data collected in 2022. The agency uses current mortality patterns to estimate the average number of years someone can expect to live if things stay the same. It doesn't try to predict how those patterns might change in the future.

Here are the average life expectancies at ages 60, 65, and 70.

Data source: Centers for Disease Control and Prevention.

The average retiree at age 62 can expect to bring in more lifetime income from Social Security by delaying well past full retirement age. By the time you reach age 65, you have even more reason to delay. But someone who's almost made it to 70 years old may consider taking benefits slightly before turning 70.

The life expectancy of the average 70-year-old is 85 years and four months, according to the most recent CDC data. That suggests the average person should claim Social Security the month before turning 70 to maximize their lifetime benefit. However, it's important to remember the CDC life expectancy data is based on mortality patterns from 2022. In all likelihood, longevity will increase over the next few decades.

That data still includes effects of the COVID-19 pandemic. In fact, if you look at the CDC's life expectancy tables from 2019, it says the average 70-year-old would live until age 85 and 11 months. Barring global pandemics, life expectancies typically move higher over time. That was the whole reason for the 1983 Social Security amendment.

As such, the average retiree should wait until age 70 to claim benefits to take advantage of the imbalance in the Social Security program as it stands today. Unless you have reason to believe you'll experience a shorter-than-average lifespan, you'll get more out of the program by waiting.

Granted, not everyone can afford to wait until 70. If you need supplemental income now, it makes sense to forgo the opportunity to maximize your lifetime income from Social Security in exchange for a better life today. But if you can get by without it, it pays to delay your benefits.