Social Security provides an incentive to workers who choose to hold off on taking their retirement benefits. You can claim your Social Security as early as age 62, but if you do, you'll have to accept smaller monthly checks than you'd get if you waited until your full retirement age. Conversely, if you wait beyond full retirement age to claim your worker retirement benefits, then you'll qualify for what are known as delayed retirement credits and potentially boost the size of your monthly Social Security check.
That system has been in place for years, and it's been a lucrative one for Social Security recipients with the patience to wait. However, 2020 will be the last year in which the level of delayed retirement credits that's been in place for a long time will still hold true. After that, the maximum amount of delayed retirement credits will gradually fall, leading to smaller boosts to monthly checks. In addition, some believe that further reductions to delayed retirement credits are just a matter of time.
Social Security pays you more for taking your benefits late
Much of the complexity about Social Security comes from the varying sizes of checks that you can get depending on when you decide to claim. But the idea behind all those complicated calculations is actually fairly simple: The goal of the Social Security Administration is to make it so that the total payments made over the course of your lifetime will be roughly identical if you live to your average life expectancy, no matter whether you claim at age 62, age 70, or somewhere in between.
So as a result, those who claim earlier than full retirement age get smaller checks, since they get more of them over the course of their lifetime. Meanwhile, those who wait will get bigger checks, in order to make up for the fact that they'll get fewer of them.
The rules governing delayed retirement credits are actually reasonably easy to understand. For every month you wait beyond your full retirement age through age 70, your monthly retirement check from Social Security will go up by two-thirds of a percentage point. So if your full retirement age is 66, your regular benefit would be $1,500, and if you decide to claim benefits at 68, then you'd boost the monthly payment by 24 months times two-thirds of a percent per month, or 16%. That would give you monthly checks of $1,740 -- 16% higher than $1,500.
What's happening in 2021?
2020 is the last year in which someone turning 66 will have a full retirement age of 66. Because you can collect delayed retirement credits through age 70, that means that those turning 66 this year will have the option of waiting until they turn 70 and potentially earning four full years' worth of credits. That'll boost their total benefits by 32%.
Starting in 2021, however, those turning 66 will have an older full retirement age. For instance, those turning 66 in 2021 will have a full retirement age of 66 and two months. Those turning 66 in 2022 will have to reach 66 and four months to hit full retirement age, with subsequent increases finally topping out at age 67 for those turning 66 in 2026 or later.
You can never delay retirement benefits past 70 and still get credits, so a higher full retirement age means that the maximum delayed retirement credit is smaller. For example, if your full retirement age is 67, then your maximum delayed retirement credit will be just 24% -- 36 months at two-thirds of a percent per month.
Are more cuts coming?
Moreover, some have suggested that full retirement ages could rise even further in the years to come. Without a corresponding increase in the maximum age for delayed retirement credits, that could produce more substantial reductions in maximum benefits.
All sorts of factors go into deciding when you should claim Social Security, but the extra money for delayed retirement credits is a big factor. To the extent those credits get smaller, it will potentially make it harder to get as much as you can from Social Security.