Social Security is vital for more than 60 million Americans, and the income the program provides plays a key role in keeping many of them financially secure in their retirement. Yet Social Security has gone through plenty of financial difficulties over the years, and with a new crisis on the horizon, many expect that cuts to the program will be necessary to keep it viable for both its current recipients and those who are counting on it being there when they need it in the future.
This isn't the first time Social Security went through challenging times, and what many people don't realize is that they're already taking a small but steady hit to their benefits as a result of the last solution from lawmakers. It's been more than 35 years now since that schedule was initially set, but those who are retiring now are the ones paying the price. Here, we'll look at the details behind the latest in a series of small benefit cuts affecting millions of Americans.
Why Social Security reform in the 1980s changed the full retirement age
Back in the early 1980s, Social Security was going through a significant financial challenge. The number of participants in the program had steadily risen, while the number of workers supporting each retiree had fallen. As a result, the pay-as-you-go funding that had sustained Social Security throughout the first 40 years of its history was no longer working well.
To address the problem, the Social Security Amendments of 1983 enacted a set of major changes to the program. In addition to boosting payroll tax rates and imposing income tax on Social Security benefits for some recipients, the new legislation also pushed the full retirement age up from 65 to 67.
However, lawmakers recognized that making an immediate change to the full retirement age would have been harmful to those who were about to retire and had made their financial plans according to the old rules. As a result, the implementation of the higher retirement age was scheduled for a gradual phase-in, with a rise from 65 to 66 in two-month increments for those reaching the early retirement age of 62 between 2000 and 2005. A pause would follow, and then the subsequent rise from 66 to 67 would take place for 62-year-olds beginning in 2017. For 2019, the full retirement age for 62-year-olds will go up to 66 1/2, from 66 and four months for those turning 62 in 2018.
Tiny cuts add up
This boost in the full retirement age will force those born in 1957 to wait two months longer to get their full retirement benefit than those born in 1956 had to. The way that translates into a benefit cut, though, is that the reductions for those claiming earlier than full retirement age will grow. For instance, someone who files at 62 will get their benefits 54 months prior to full retirement age, rather than 52 months for someone in the same situation last year.
The impact of that two-month change is small but significant. The formula for monthly benefits forces you to accept five-twelfths of a percentage point less in benefits for every month above 36 months that you claim early. So be treated as claiming two months earlier will cost recipients five-sixths of a percentage point, taking their payment from 73 1/3% to 72 1/2% of what they'd get at full retirement.
Someone with a full retirement benefit of $1,500 per month will get just $1,087.50 per month claiming at 62 in 2019, rather than the $1,100 in monthly income that a similar recipient turning 62 in 2018 would have gotten. That $12.50 per month might not seem big, but those on a fixed income will miss that lost money. Moreover, a similar-sized decline applies to spousal benefits claimed early as well.
Why waiting doesn't really help
At first glance, the obvious solution would be just to wait until full retirement age and get your full benefits. Yet even that won't get you as much money as you would have if the increase in the full retirement age hadn't happened.
For instance, workers claiming retirement benefits are typically entitled to receive delayed retirement credits if they wait beyond full retirement age to do so. Those credits give you two-thirds of a percentage point per month that you wait.
Therefore, someone who has to wait an extra two months before reaching full retirement age still loses something. If those who turned 62 in 2018 decided to wait until 66 1/2 to retire, they would've gotten credit for two extra months of delayed retirement, boosting their benefits by 1 1/3%. Those who turn 62 in 2019 won't get anything extra.
Look out for similar cuts in future years
The schedule set out in the 1983 amendments imposes similar increases to the full retirement age for 2020, 2021, and 2022. As a result, those nearing retirement need to understand that the changes that have been in the works for decades are finally taking effect -- and they'll be the first ones to see the impact on their benefits compared to their older counterparts.