When Should You Take Social Security? Inflation Adds a New Wrinkle

It’s no secret that the pandemic has driven many older adults from the workforce. Over the past two years, 3.5 million workers joined the ranks of retirees compared to just 1 million per year from 2008–2019.i And with roughly 10,000 baby boomers turning 65 every day, the question of when to start claiming Social Security has reached a crescendo.ii Unfortunately, today’s bout of inflation only complicates matters.

Even during the best of times, weighing when to take Social Security involves several moving parts—including your health, return expectations, and life expectancy (as well as that of your spouse), just to name a few. Before last year, inflation-sensitivity was largely an afterthought. Now, inflation is on the top of everyone's mind, particularly soon-to-be retirees.

To Claim or Not to Claim

Before addressing the inflation wild card, let’s start with the options for claiming Social Security benefits. The Bipartisan Budget Act of 2015 eliminated two popular strategies called “file and suspend” and filing a “restricted application.”iii Today, anyone born on January 2, 1954 or later who claims their benefits is deemed to have filed for them in their entirety.iv This means no more half measures—upon filing, you will receive all benefits due to you based on your working record or that of your spouse (in the case of a spousal benefit).

You’re eligible to claim benefits as early as age 62 or as late as age 70, but the amount you’ll receive depends on when you file within this window. For example, someone born after 1960 and claiming benefits at age 62 would receive 70% of the benefits they’d otherwise be entitled to at age of 67 (Display). On the other hand, they’d earn an annual 8% credit for each year they delay claiming past age 67. In other words, waiting to claim Social Security until age 70 could increase your benefit by 24%.

Social Security Benefits by Age


A Bird in the Hand?

Does it make sense to take reduced benefits sooner or enjoy larger benefits later? In short, it depends. Consider a 62-year-old retiree who is weighing her options. If she claims her benefits now, she’d receive $27,031 per year, whereas waiting until age 67 or 70 would net her $38,616 or $47,884, respectively.

Claiming benefits at age 62 will provide benefits sooner. But there’s a trade-off—she’ll end up with less cumulative benefits the longer she lives. In fact, if she waited to claim at full retirement age (67), she would need to live to nearly 78 to ultimately accumulate more wealth (Display). Delaying to age 70 would push this “tipping point” past age 82½.

Put another way, the longer you live, the more you’ll likely gain by delaying your claim—assuming all else remains equal. That’s where inflation comes into play.

Claiming Benefits Early Provides Less Wealth over Time


The Inflation Curveball

In 2022, inflation rose by 8%, the largest increase since 1981. This spike could have a devastating impact for retirees on a fixed income or those spending from their portfolios as it forces them to tap increasing amounts to maintain their lifestyles.

Today, few investment solutions offer inflation-adjusted income—other than Social Security, which applies an annual Cost of Living Adjustment (COLA) to its benefit payments.v Since 2000, recipients have received an average COLA of 2.6% with the highest adjustment coming in 2023 at 8.7%.

How does this impact your decision? By delaying your claim, not only do you receive a larger payment—you also benefit from the COLA applying to a larger amount. Over time, this serves as a built-in hedge against high inflationary environments and lowers your inflation sensitivity. This protection becomes particularly salient for those spending from their portfolios as more of their income will keep pace with inflation-adjusted living expenses.

Filling the Gap

To illustrate this point, let’s revisit our earlier 62-year-old retiree and project what her portfolio spending might look like by the time she reaches age 80 under two environments: benign inflation and an inflationary spike (Display). Recall that her annual benefits amount to $27,031 (at age 62), $38,616 (at 67) or $47,884 (at 70).

Even under relatively low inflation like we’ve enjoyed for decades, claiming benefits at age 62 results in the largest spending bite from the portfolio (2.61% versus 1.56% or 0.71% for ages 67 and 70, respectively). But when inflation rears its head, this bite becomes even more pronounced. That’s because higher prices for things like food, gas, and housing create a shortfall in what’s currently covered by income—a gap that must be filled by more spending from the portfolio. Ultimately, if inflation does run higher than what we’ve seen over the last 20 years, delaying benefits to age 70 will provide better inflation protection for the portfolio over time.

Higher Inflation Results in a Larger Percentage of the Portfolio Being Spent if Benefits Are Claimed Early


See the Whole Picture

Keep in mind, inflation is just one of several factors that impacts the timing of your Social Security benefits claim. There’s no blanket advice, although variables like part-time work, health and longevity, the age disparity between spouses, and risk tolerance also play important roles. Your Bernstein Financial Advisor can help you determine the best strategy based on your individual circumstances. 

Andrew Bishop, CFA
Director—Wealth Strategies Group

i Retirees aged 55 and older. Source: https://www.pewresearch.org/fact-tank/2021/11/04/amid-the-pandemic-a-rising-share-of-older-u-s-adults-are-now-retired/

ii https://www.cnbc.com/2019/06/10/its-not-baby-boomers-who-have-taken-the-most-from-social-security.html

iii If you were born before January 2, 1954, you may still file a restricted application.

iv Deemed filing applies to retirement benefits, not survivor’s benefits. If you are a widow or widower, you may start your survivor benefit independently of your retirement benefit. Deemed filing also does not apply if you receive spouse's benefits and are entitled to disability, or if you are receiving spousal benefits because you are caring for the retired worker’s child. Source: Social Security Administration.

v The Social Security COLA is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) and is measured from the prior year’s third quarter to the current year’s third quarter.

The views expressed herein do not constitute, and should not be considered to be, legal or tax advice. The tax rules are complicated, and their impact on a particular individual may differ depending on the individual’s specific circumstances. Please consult with your legal or tax advisor regarding your specific situation.

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