Social Security was originally designed for people who reach full retirement age to get some extra benefits to supplement their savings. But over the years, the age of 62 has become arguably the most important birthday for Social Security recipients, because for most workers, it's their first chance to claim benefits from the program. Many older Americans take advantage of the Social Security rules to start getting monthly checks at 62.
For five years now, those turning 62 have been getting slightly less than their older peers who first claimed the previous year. Fortunately, these stealth Social Security cuts are finally coming to an end, with the last round of cuts coming in 2022. Let's take a look at why this has been happening and just how much your Social Security benefits might be affected.
How stealth Social Security cuts came to be
The roots for these Social Security cuts date all the way back to the early 1980s. Lawmakers faced a Social Security financial crisis that threatened the ability of the program to keep paying benefits. In order to prevent financial collapse, lawmakers put new rules into place that helped to shore up the system.
One of the most controversial provisions in the reform of Social Security in the early 1980s raised the full retirement age (FRA) for the program. In order to avoid an immediate backlash, the provisions that boosted the age at which Social Security recipients could claim full benefits only took effect well into the future. That way, those just a few years away from retiring wouldn't take a hit, and younger workers would arguably have time to adjust their financial planning to take the increase into account.
The first increase in the Social Security FRA affected those who turned 62 in 2000. The full retirement age for that group rose to 65 and two months, and for the next five years, it increased an additional two months.
Once hitting 66, the FRA stayed stable for nearly a dozen years. However, those turning 62 in 2017 again had to wait two months longer in order to claim full benefits.
Those turning 62 in 2022 have a full retirement age of 67. That's slated to remain in place indefinitely. As a result, future retirees won't see the same cuts going forward -- at least under current law.
How big are these Social Security cuts?
The reason I call these increases in the FRA "stealth" Social Security cuts is that it's easy to overlook the effect on benefit checks. From year to year, the cuts are slight. However, when you consider the millions of people receiving Social Security, they add up to enough money to help extend the financial viability of the federal program.
It's easiest to see this effect when you consider an example. Take two people whose full retirement benefit under Social Security would be $1,800 per month. One was born in 1959, while the other was born in 1960. Both claim at their earliest opportunity at age 62.
The person who turned 62 in 2021 had a FRA of 66 and 10 months. Under the rules governing how much you have to reduce your full benefit if you claim early, this person would receive 70 5/6% of the full retirement benefit, or $1,275 per month.
However, the person who turned 62 in 2022 had a FRA of 67. The rules therefore call for a larger reduction in early benefits, paying out only 70% of full retirement benefits in this case. That works out to $1,260 -- $15 less per month.
It would be possible for the younger person to get the same $1,275 monthly benefit. That would require permanently sacrificing two monthly checks, though. Effectively, you'd be paying a one-time cost of $2,550 upfront to avoid the $15 per month reduction the rest of your life.
Are more cuts coming?
Some lawmakers want to address the current Social Security financial crisis by raising the FRA further. If such a move were to happen, it would most likely happen the same way, with stealthy increases in the future.
Social Security plays a key role in the finances of older Americans, but it's not carved in stone. It's important to keep up to date on everything that happens with the program so that you notice everything that could affect your benefits both now and in the future.