When Social Security was created, the program set a "full retirement age." If you claimed benefits at exactly this age, you would be entitled to your standard benefit or primary insurance amount (PIA). You had the opportunity to start payments before or after it, but doing so would affect the monthly income you received.
Originally, the full retirement age was 65 for everyone. But that changed with amendments to Social Security in 1983. FRA has been gradually moving later and, for anyone who turns 66 in 1960 or after, the full retirement age is 67 -- a whopping two years beyond the original age you had to reach.
A later full retirement age has serious consequences for those who depend on Social Security as a retirement income source. Here are three ways in which this change could affect you.
Image source: Getty Images.
1. You'll have to wait longer to claim benefits to avoid penalties
The most obvious way a later full retirement age impacts you is that you must wait longer to claim Social Security and get your standard, unreduced benefit. For every month you claim before your FRA, benefits will be reduced by a small percentage (5/9 of 1% for the first 36 months and 5/12 of 1% for every prior month).
While you could once claim at 65 without being hit with those penalties, anyone born in 1960 or after will now have to wait until 67. Anyone turning 66 this year must wait until they are 66 years and 8 months old to avoid a reduction in benefits.
Having to wait longer not only means passing up the income you could have gotten but also getting stuck staying in the workforce for longer or taking the hit of a permanent benefits reduction. This hurts seniors who want to leave work as soon as possible but who don't want to reduce their Social Security checks for life.
2. You'll have fewer opportunities to earn delayed retirement credits
A later full retirement age also means seniors don't have as many opportunities to increase their benefits beyond the standard payment they're entitled to.
See, Social Security provides delayed retirement credits for each month after FRA you wait to claim benefits until you reach the age of 70. When FRA was moved to 66, a maximum of four years of credits were available. Now, for those born in 1960 or later, a maximum of three years of delayed retirement credits can be earned.
Delayed retirement credits increase your monthly checks by 2/3 of 1% for every month you wait. Being able to raise your benefit by a maximum of 24% instead of 32% can make a big difference in the income you ultimately bring home each month.
3. You'll be subject to an earnings limit for longer
Finally, there's another big downside. It affects how much you can earn from a job while also getting Social Security benefits.
When you have reached full retirement age, you can work as long as you want and earn as much as you want without any reduction in the Social Security checks you receive. But if you have not reached that milestone yet, you're subject to earnings limits.
If you earn more than the allowable amount, benefits are reduced or even eliminated (although your benefits are eventually recalculated later to account for this). This can impact your ability to get money from both a job and Social Security. Unfortunately, with a later full retirement age, this rule affects you for longer and impairs your financial flexibility.
These are three big downsides of your full retirement age moving later -- and every future retiree needs to be aware of them as they make their retirement plans.
