Tens of millions of people rely on Social Security for retirement income, and many of them count on the program for the vast majority of the money they need to pay their living expenses. Financial challenges to Social Security threaten the long-term viability of the program.
Yet many people don't fully understand that already under current law, Social Security is going through a transition that's resulting in new early retirees getting less in monthly benefits. After starting a new series of reductions in 2017, another 3 million 62-year-olds will face the prospect in 2018 of further reductions in Social Security -- thanks to actions that lawmakers took nearly 35 years ago. The cuts are relatively modest, but overall, they're intended to reduce dramatically the total amount of money that Social Security will have to pay out over the long run.
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Why is Social Security on the decline?
The way in which lawmakers authorized the Social Security Administration to cut benefits to new program participants was to make changes to the full retirement age. For those who turn 62 in 2018, the full retirement age will be 66 and four months. That's up by two months from the full retirement age that those who turned 62 last year faced, and up by four months from the 66-year-old age that those who turned 62 between 2005 and 2016 had as their full retirement age.
These legal changes came about as part of major entitlement in the early 1980s. The Social Security Amendments of 1983 were designed to address more immediate concerns about the sustainability of the Social Security system. Under those rules, the full retirement age was set to rise from 65 to 67 in two distinct phases. The first affected 62-year-olds from 2000 to 2005, who gradually saw retirement ages rise from 65 to 66. The current phase will end when the retirement age hits 67 for those turning 62 in 2022.
How much of a benefit cut is it?
At first glance, it might not seem like a change in full retirement age is really a benefit cut. However, the 1983 Social Security laws didn't change the ability of 62-year-olds to file for early benefits. It just imposed further reductions on those who claimed early.
Under the method that the SSA uses to calculate monthly benefits, every month before full retirement age that you claim early results in a reduction of five-ninths of a percent for the first 36 months, and then five-twelfths of a percent for additional months. If your full retirement age goes from 66 and two months to 66 and four months, then claiming at 62 means you'll have to deal with two months of further reductions. That amounts to five-sixths of a percentage point, and so your full retirement age benefit will be reduced by 26 2/3% rather than 25 5/6% for those who turned 62 in 2017.
Admittedly, an extra reduction of five-sixths of a percentage point might not seem to make that big of a difference. For a typical person who could get a full retirement benefit of $1,500 per month if they waited until full retirement age, the reduction would amount to $1,100 per month for this year's 62-year-olds compared to last year's $1,112.50.
Similar rules apply to those who are claiming benefits under their spouse's work history. The reductions are greater, rising from 30 5/6% to 31 2/3% for those who claim spousal benefits at age 62.
What if I just wait to claim?
It's important to understand that no matter when you claim, a higher retirement age will result in lower benefits. For instance, those who wait until age 70 typically get two-thirds of a percentage point in delayed retirement credits for each month they wait beyond full retirement age. An increase of two months in the full retirement age means two fewer months of credits, costing you 1 1/3% in total. Similar reductions exist regardless of when the roughly 3 million people who turn 62 in 2018 choose to claim their Social Security.
New proposals have identified raising the retirement age still further as a possible way to solve current financial challenges that Social Security faces. In considering those proposals, it's essential to understand that such changes are already going on and the consequences that those changes are having on people who are retiring right now.
