1 Fundamental Point Voters Need to Know About Social Security Before the Election

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What do voters need to know to make an informed decision about political proposals to address the impending shortfall in the Social Security trust funds?

That's one of many question I asked Andrew Eschtruth, associate director for external relations at the Center for Retirement Research at Boston College. The first thing that came to his mind was that an increase in the full retirement age, while often considered an alternative way to reduce strain on the funds that doesn't involve benefit cuts or tax increases, is actually nothing more than the former in disguise.

This an important point given that multiple presidential candidates have proposed changing the age that Social Security beneficiaries become eligible for their primary insurance amount -- i.e., how much you're entitled to receive each month if you claim benefits at full retirement.

The full retirement age was originally 65. But over the years it's climbed in response to concerns about the Social Security system's viability, most notably in the early 1980s. The full retirement age for anyone eligible to apply for benefits today is 66. But for people born in 1955 or later, the age ratchets up by two months for each successive birth year until reaching 67 for those born in 1960 or later.

Source: Social Security Administration.

"What people need to understand about proposals that would increase the full retirement age further is that doing so is in fact a benefit cut," Eschtruth explained. "It's not a third way to address the pending shortfall that's separate and distinct from reducing benefits or increasing revenue."

This is an easy point to illustrate. To make things simple, let's say the full retirement age is raised from 66 to 67 in one fell swoop. The impact of this on one's benefits would be threefold.

First, it reduces benefits for people who apply for Social Security prior to their full retirement age. You can qualify for benefits as early as 62, which, in fact, happens to be the most prevalent age at which people do so. The catch is that the size of your benefits will be actuarially adjusted to account for the fact that you'll be getting more checks for longer than someone who waits until full retirement age to claim them.

More specifically, your benefit will be reduced by five-ninths of one percentage point for each month before your full retirement age, up to 36 months, the Social Security Administration explains. And if the number of months exceeds 36, then the benefit is reduced by five-twelfths of one percentage point per month after that. Here's how this works out for people who are eligible for benefits today:

Source: Social Security Administration. Chart by author.

If the full retirement age is raised to 67, in turn, and assuming no other changes are made, then someone applying at 62 would receive 30% less than the primary insurance amount. That compares with a 25% reduction for someone applying at age 62 if the full retirement age is instead 66, as it is in the preceding table.

The second way an increase in the full retirement age reduces benefits is by making people wait an additional year to begin receiving checks if their objective is to get their entire primary insurance amount. This wouldn't affect the size of your monthly benefits, as it does in the first case, but it would decrease the amount you receive over the course of your retirement.

Let's say, for example, that your primary insurance amount is equal to $1,200, a little less than the average in 2015. Multiply that by 12, and you get $14,400 in foregone benefits that you would have received over your lifetime if the full retirement age hadn't changed from 66 to 67.

The final way an increase in the full retirement age cuts benefit is by reducing the amount of delayed retirement credits one can accumulate by waiting until 70 before applying. For every year people wait after reaching full retirement, they get an 8% increase. If the full retirement age is raised from 66 to 67, in turn, using the same example, then the maximum benefit one can receive at age 70 falls from 132% of one's primary insurance amount down to 124%.

Thus, to Eschtruth's point, it's clear that an increase in the full retirement age translates directly into a decrease in benefits, no matter how you look at it.