More than 48 million retired workers received a Social Security check in November, and based on historical data, another 3 million workers will likely claim retirement benefits in 2023. Social Security represents an important source of income for most of those individuals, but many Americans are misinformed about certain aspects of the program.
Here are three things to consider before claiming Social Security retirement benefits next year.
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Retirees who claim Social Security early are penalized with a reduced benefit
Only 13% of adults can correctly guess their full retirement age (FRA), according to a survey from Nationwide Retirement Institute. That is problematic because the age at which benefits start has a big impact on the amount of income Social Security provides in retirement.
Eligibility for retirement benefits starts at age 62, but workers are not entitled to their full benefit (also called the primary insurance amount) until they reach FRA. Anyone who claims retirement benefits prior to FRA is permanently penalized with a reduced monthly payment, and anyone who delays retirement benefits beyond FRA is permanently credited with an increased monthly payment. For that reason, workers must know their FRA, and they must understand how benefits would be impacted if they claimed Social Security early.
The chart below details FRAs based on birth year, and it shows the penalty that would be applied to individuals in each cohort if they start retirement benefits at age 62.
|
Birth Year |
Full Retirement Age (FRA) |
Benefit Reduction At Age 62 |
|---|---|---|
|
1955 |
66 and 2 months |
25.83% |
|
1956 |
66 and 4 months |
26.67% |
|
1957 |
66 and 6 months |
27.50% |
|
1958 |
66 and 8 months |
28.33% |
|
1959 |
66 and 10 months |
29.17% |
|
1960 and later |
67 |
30.00% |
Source: Social Security Administration.
As indicated above, workers born in 1960 or later receive the most severe penalty (a 30% reduction in benefits) if they start Social Security at age 62. But the penalty is gradually phased out as a worker approaches FRA. This calculator from the SSA can be used to determine the exact penalty.
Income limits apply to workers who claim Social Security retirement benefits early
Rising prices have taken a toll on many Americans over the past year, and with inflation still lingering near a four-decade high, some workers are changing their retirement plans. For instance, 26% of baby boomers (people born between 1946 and 1964) not currently on Social Security plan to start retirement benefits early while continuing to work, according to the Nationwide Retirement Institute.
To clarify, the SSA refers to any worker on retirement benefits as a "retired worker," but any eligible individual can claim Social Security regardless of work status. In other words, active workers can receive retirement benefits provided they meet the minimum age requirement. But workers who start Social Security before FRA are temporarily penalized with a reduced monthly payment if their income exceeds certain thresholds.
Specifically, there are two different income limits. The lower limit applies to workers under FRA for the entire year, and the higher limit applies to workers that attain FRA during the year. For both cases, the chart below provides details.
|
Age in 2023 |
Income Limit |
Penalty |
|---|---|---|
|
Workers under FRA for the entire year |
$21,240 per year |
$1 in benefits is withheld for every $2 in earnings that exceed the limit |
|
Workers who attain FRA during the year |
$56,520 per year |
$1 in benefits is withheld for every $3 in earnings that exceed the limit |
Source: Social Security Administration.
It's worth reiterating that these income limits only apply to workers under FRA. Once a worker reaches FRA, the income limits no longer apply. In addition, for every month's worth of benefits withheld, workers are given credit for having claimed their Social Security a month later, giving them a modest future boost to their Social Security payments.
Eligible workers in the future will still get the positive impact from the COLA
Social Security benefits will get a monster 8.7% cost-of-living adjustment (COLA) in 2023 to offset the impact of red-hot inflation in 2022. That is the largest COLA since 1982 and the fourth-largest COLA in history. But workers should not let that information influence their decision to claim benefits (or not claim benefits) next year.
The SSA calculates the primary insurance amount (PIA) for each worker when they reach age 62 (the age of eligibility). As referenced earlier, the PIA is the benefit a worker would receive at FRA. But once a worker reaches age 62, COLAs are automatically added to their PIA even if they do not currently get retirement benefits. In other words, workers who choose not to claim Social Security next year will still see the impact of the massive COLA whenever they start benefits.
