07/10/2009 05:12 am ET Updated May 25, 2011

Recession Forces a Bad Choice: Filing Early for Social Security

A growing number of older Americans are robbing Peter to pay Paul by filing early for Social Security.

New federal government data shows that applications for Social Security benefits are running well ahead of the rate expected due solely to aging of the population. The most likely cause is the recession and layoffs of older workers who, in turn, decide to throw in the towel on work and retire earlier than planned.

Social Security benefits can be tapped at age 62, but filing before age 66--the so-called Normal Retirement Age (NRA)--is considered early according to the government's definition. Taking early benefits usually translates into a sharp reduction in lifetime Social Security payouts under the system's formulas, and a higher risk of poverty in old age.

For the fiscal year that began last October 1, applications for retired worker benefits are running about 9 percent higher than the rate attributable to normal demographic trends, according to a memorandum from Stephen C. Goss, chief actuary of the Social Security Administration (SSA).

"At this time, it is not possible to say what will happen for the rest of FY 2009," Goss said. "But it is likely that total retired worker benefit applications will turn out to be about 5 to 10 percent higher during fiscal 2009 than had been expected in the absence of a recession."

When you file for benefits early, the SSA reduces your benefit to avoid paying higher lifetime benefits to you than it does to someone who waits until their NRA is reached. Your lifetime benefits will be reduced for most of the years you start early, based on an actuarial projection of longevity.

Conversely, for every year you wait to file, Social Security adds 7 percent to 8 percent to your annual benefits. And if you can delay taking benefits beyond the NRA, the difference is even greater. The SSA will bump up your payment an additional amount for every year you delay filing for benefits. The net effect: If you wait until you're 70, your annual benefit will be 32 percent higher than it would be if you started at age 66--and in addition to the 32 percent, you also get all the cost-of-living adjustments (COLA) from the intervening years.

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