Social Security faces a long-term financial crisis. The demographic bump of baby boomers that have been retiring in recent years will continue to flow into the Social Security system for many years to come, and the corresponding outflow of Social Security benefits will not only use up all available payroll tax revenue but also eat into Social Security trust fund reserves. Current projections suggest that by the mid-2030s, Social Security will have a shortfall that leaves roughly a quarter of scheduled benefits unfunded.
Many lawmakers see raising the full retirement age for Social Security benefits as a potential solution to the program's financial woes. Proponents cite the rise in life expectancies and the resulting shift in demand for Social Security as reasons to modify the retirement age upward. Yet with many of the proposals to raise the retirement age, the net impact likely won't be to get people to claim Social Security later but rather simply to reduce what they receive when they do claim.
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The history of Social Security's retirement age
Proposals to increase the retirement age for Social Security aren't new. One need only look back at history to see how such ideas have played out in the past. Back in the early 1980s, a grand compromise between President Ronald Reagan and a Democratic-controlled Congress led to a gradual increase in the retirement age. Over the course of nearly 40 years, the retirement age went from 65 to 67, with a long break in the middle at 66. Currently, those who have turned 62 in the past year have started to see slightly older retirement ages, and the age will rise in two-month increments annually before topping out at 67.
Now, lawmakers are looking at similar proposals for the future. Ages of between 68 and 70 have been suggested for a possible new law, with the same arguments about economic stability of the program supporting the moves. Yet amid most of the proposals, few actually stop to look at the actual impact on benefits that would occur.
Does a higher retirement age really affect behavior?
The way that most people discuss potential increases in the retirement age suggests that people would end up working longer. There's an idea that most people used to work until hitting 65. When the Social Security full retirement age and the age for claiming Medicare were aligned at that same 65-year-old point, there were multiple reasons why people would target 65 as a prospective retirement date.
Yet when it comes to claiming actual benefits, few people wait that long, and the rise in retirement age to 66 and subsequently toward 67 has shown no signs of reversing that trend. More people claim at 62, when early Social Security benefits first become available to workers, than at any other age. That fact hasn't changed markedly even with changes in the full retirement age under the program.
Higher full retirement age + no change in claiming behavior = benefit cut
When lawmakers advocate for higher retirement ages without making similar changes to the age for collecting early benefits, then net impact is simply to cut monthly benefits to retirees. The exact amount depends on the age at which you'd claim, but in general, benefits go down between 5% and 10% for every year that the retirement age goes up. As an illustration, you can see below what happened when the full retirement age went from 65 to 66 and what will happen as it moves to 67.
|
Claiming Age |
Benefit With Full Retirement of Age 65 |
Benefit With Full Retirement of Age 66 |
Benefit With Full Retirement of Age 67 |
|---|---|---|---|
|
62 |
$750 |
$700 (7% less) |
$650 (13% less) |
|
63 |
$833 |
$750 (10% less) |
$700 (16% less) |
|
64 |
$917 |
$833 (9% less) |
$750 (18% less) |
|
65 |
$1,000 |
$917 (8% less) |
$833 (17% less) |
|
66 |
$1,080 |
$1,000 (7% less) |
$917 (15% less) |
|
67 |
$1,160 |
$1,080 (7% less) |
$1,000 (14% less) |
|
68 |
$1,240 |
$1,160 (6% less) |
$1,080 (13% less) |
|
69 |
$1,320 |
$1,240 (6% less) |
$1,160 (12% less) |
|
70 |
$1,400 |
$1,320 (6% less) |
$1,240 (11% less) |
Data source: Social Security Administration. Based on $1,000 primary insurance amount as determined by work history.
Similar cuts would occur under current law if retirement ages were increased from 67 to higher levels.
Proponents argue that giving early retirees the chance to get at least some benefits is better than simply eliminating the ability to claim early at all. Yet with many people relying on Social Security for the bulk of their retirement income, reducing that amount further from current levels is a recipe for financial disaster for millions of Americans.
Consider the consequences
There's no easy solution to Social Security's financial woes, and other proposals to shore up the system would also have impacts on participants and the American public as a whole. As lawmakers come up with new ideas, you'll want to look at them closely to see what the true impact is likely to be. Only if you're comfortable with all the consequences does it make sense to support one proposal over another.
