When to Take Social Security?

Dr K C Gupta, YBB Personal Finance

You can start collecting Social Security benefits early at age 62 with up to 30% penalty (graduated) or delay benefits up to age 70 with up to 32% bonus (graduated). The full retirement age (FRA) is between 66-67 based on the date of birth. The side benefits of taking Social Security before age 65 are that Medicare signup at age 65 is automatic & the Medicare premiums are just deducted from the Social Security payments (otherwise, a separate application for Medicare is required & you may be billed monthly or quarterly). Notably, Medicare signup at age 65 is through Social Security Administration (SSA), but billing & benefits are handled later by the federal CMS.

Annual adjustments (COLA) to SSA payments are based on year-over-year increases in the Q3 averages of the CPI-W (July, August, September readings). These adjustments become known in mid-October (2025 COLA est +2.5% pending CPI-W on 10/10/24) but are officially announced by the SSA in November or December. There is some discussion about replacing the CPI-W (workers) with a newer CPI-E (elderly).

Make decisions to start SSA payments early at age 62 (29% opt for it), at FRA (29% opt for it), or late at age 70 (only 10% wait for it) based on your personal financial situation. Explanations to take them early are that (i) many need the money for living expenses, (ii) some who don’t need the money still like spare cash now for discretionary expenses while they are healthy, & (iii) except for related dependent & survivor benefits, the SSA payments stop at death, so higher benefits later may not materialize.

Some who delay Social Security may rely on pensions, annuities, & withdrawals from tax-deferred accounts (T-IRA, 401k/403b) & taxable accounts.

A 2nd chance is possible for those who started early but then change their mind – they can suspend benefits at/after their FRA, & their higher benefits will resume at 70, but beware that most related spousal benefits will also suspend (an abusive loophole was closed in 2015).

The breakeven ages for starting Social Security benefits early vs late range from late-70s to early- 80s. There are special strategies for couples with different levels of income; for example, the lower income spouse may start the benefit earlier (to get maximum of own or spousal benefit) & the higher-income spouse may delay the benefit.

Many federal & state employees don’t participate in Social Security due to historical exemptions, but may qualify for spousal benefits based on the work records of their spouses. If some of your previous job(s) weren’t covered by Social Security (i.e. you didn’t have to pay the FICA payroll tax), then your benefit payments may be reduced due to the WEP (Windfall Elimination Provision).

Another, GPO (Government Pension Offset), may reduce your spousal benefit payments. Spousal benefit for Medicare (if not eligible on own) is not affected by these offsets. These WEP & GPO offsets are harsh & there are proposals to reduce or eliminate them in some cases.

If you get Social Security, there are restrictions on your earned income until you reach the FRA; specifically, your benefits will be reduced. These restrictions don’t apply to the unearned income or to the earned income after the FRA.

Portions of your Social Security payments may be taxable based on your combined income (AGI + nontaxable interest + 0.5 x Social Security payments). These taxes have the effect of reducing benefits for those with higher income.

Worries about the finances of Social Security shouldn’t lead people to take benefits early. It’s a form of social support system that is intended to provide only partial income needed in retirement & some dependent, spousal & survivor benefits. It would be fixed before drastic 21-23% SSA payment cuts kick in 2033 when the Treasury IOUs run out & the FICA payroll taxes must be equal to the SSA payments. The so-called SSA trust fund is just a Treasury IOU, not a segregated fund that can be redeployed. Proposals to fix Social Security include increasing payroll tax & applicable salary limits, benefit reductions (including raising FRA or eligibility age, taxes), means testing, etc.

Problem is that politicians don’t want to deal with tough choices until it becomes absolutely necessary.
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