This article was updated on Nov. 20, 2016.
Social Security has been the target of many proposals over the years that were aimed at helping to make the program more financially sustainable. What many Americans don't realize is that the laws that are already in place will start taking effect for early retirees in 2017, and they'll have the effect of reducing benefits below the level that current recipients receive. Below, we'll explain just how much these benefit changes could cost you, but first, let's look at how these provisions became law in the first place.
Changes are coming
Way back in 1983, policymakers foresaw challenges to the Social Security program. In response, the Social Security Amendments of 1983 called for an increase in the full retirement age from the previous level of 65. The first stage of the increase started in 2000, when the retirement age for those turning 62 began to rise by two months each year, topping out at age 66 for those who turned 62 in 2005.
The law then called for the retirement age to remain stable for a 12-year period. Beginning in 2017, however, another sequence of two-month annual increases is slated to begin, with the new full retirement age of 67 taking effect for those turning 62 in 2022 and later.
How a higher full retirement age cuts your benefits
The new law doesn't prevent those who are eligible for Social Security to start claiming early benefits at age 62. But it does reduce the amount of the monthly benefit you'll receive if you begin to receive Social Security at your earliest opportunity.
Specifically, the calculation rules for Social Security benefits reduce your monthly payment by 5/12 of a percentage point for every month beyond 36 months before full retirement age that you start getting Social Security checks. If you turn 62 in 2017, then your full retirement age will be two months later than someone turning 62 in 2016. That means your benefits will take a hit from two additional months' worth of reductions, totaling a drop of five-sixths of a percentage point of your full retirement benefit.
By the time the full retirement age reaches 67 for those turning 62 in 2022, five years' worth of those annual hits of five-sixths of a percentage point will add up to five percentage points of declines. Since those percentages are calculated on your full benefit, the actual percentage drop compared to someone with a younger full retirement age is actually larger.
For instance, in the chart above, you can see that someone turning 62 in 2017 who would be entitled to a full retirement benefit of $1,000 per month will get $9 less, or 1.2% less, than the $750 that someone with the same work history who reached 62 in 2016 would get. Those who turn 62 in 2022 will get $50 less, working out to a 6.7% cut.
The same rules apply to spousal benefits, although the baseline reduction is already greater in their case. The change in full retirement age will increase the discount for early claiming from 30% to 35% for those spouses who turn 62 in 2022 or later, with smaller hits for those who turn 62 between 2017 and 2021.
You'll get less no matter when you claim
Indeed, the changes even penalize those who wait until age 70 to start claiming benefits. Delayed retirement credits accumulate at the rate of two-thirds of a percentage point per month, working out to 8% per year. Currently, those with a full retirement age of 66 can get delayed credits that add up to as much as 32%. When the full retirement age starts rising, that maximum will fall, bottoming out at just 24% for those born in 1960 or later. Yet because the law changes are based on a person's birth year, they won't affect those who are planning to claim at age 70 until 2025.
Many proposals to reduce Social Security benefits have made the rounds lately, but many people don't realize that this already-enacted legislation is about to take effect. Going forward, it's important to take these law changes into consideration in order to make sure you plan correctly for your retirement.