The Benefit Cut Playbook: Raising the retirement age

The age at which an American worker claims their Social Security benefit has a dramatic effect on the amount they will receive each month during retirement — far more than some nearing retirement may realize.

Though every American worker may choose to take retirement at any time after age 62, the full retirement age sits at 66 for those born between 1943 and 1954, and is set to rise to 67 for those born after 1960.

In order for a worker to receive his maximum or full Social Security benefit, he would need to wait to reach his full retirement age (FRA) before claiming his first Social Security payment.

However, for aging Americans, waiting until 66 or 67 to retire isn’t always an option. Illness, disability, life changes, unemployment, and downright exhaustion can make waiting for full retirement age incredibly difficult if not impossible for many seniors. It’s estimated 60% of retirees opt to claim their benefits before their FRA.

But doing so comes at a price — and a hefty one, at that.

Those claiming early can expect their benefits to reduce by as much as 30% compared to what they would have received at FRA.

Conversely, for each year a worker waits to retire after 62, benefits increase by about 8% up until age 70. A worker waiting to retire until 70 has the potential to earn 32% more than their full retirement benefit.

Whether you retire early, at, or after your FRA, the amount you lock in upon enrolling will be the amount you receive for life. This makes mindfully choosing your retirement age the most important thing you can do to ensure your monthly benefit amount will meet your needs during retirement.

But with insolvency looming and Social Security reform becoming a crucial need, many legislators are yet again rushing toward raising the full retirement age to ease the pressure on the Trust Fund. Obviously, if more Americans work longer and wait longer to claim their benefits, more money is collected in Social Security taxes and less is paid out to retirees. This would undoubtedly extend solvency — at least temporarily.

But behind what appears to be a fairly simple way to put several years of solvency back on the clock for Social Security — and a great way to encourage and welcome older workers into the job market — are harsh benefit cuts that many retirees can’t afford.

Because Social Security is an age-based benefit, where FRA falls will determine the amount every beneficiary receives each month — and as the FRA climbs higher, that benefit gets lower.

If at your FRA you’re entitled to a $1,000 monthly benefit, under the current FRA, you would receive $1,000 per month if claiming at 67. If you retire early at 62, that benefit drops to $700. If waiting until 70, your benefit climbs to over $1,200 per month.

Under a FRA of 70 — a move proposed by several legislators — you would receive your full benefit of $1,000 at 70. Those retiring early at 62 would receive only $565. For life.

But as we’ve mentioned, 2/3 of retirees don’t make it to their FRA to claim their benefits already — and many of those retirees took early retirement out of medical or financial necessity. All raising the retirement age would do for future beneficiaries in the same position is force them to live with significantly lower payments.

Worse still, raising the retirement age would have a wildly disproportionate affect on low-income workers. Since high-income workers typically have better overall health and a longer life expectancy, we can expect a higher percentage of those filing at 70 or after to be wealthier.

Low-income workers, on the other hand, are much more likely to pass or become unable to work before 70 — and as the base amount of your Social Security check is based on the number of years you worked and how much you earned in your top-earning 35 years, these workers are already poised to collect much lower payments as it is.

Simply put: raising the retirement age is a severe cut to Social Security that cripples the purchasing power of low-income workers.

And when we consider the original intent of the Social Security Act — to lift America’s seniors out of poverty and make sure no one who contributes to this country is left behind when they’re no longer working — at best, “fixing” Social Security by raising the retirement age is nonsense.

And when it hits those most at risk for poverty the hardest, it becomes a farce.

This article over at The Atlantic goes more in depth about what raising the retirement age would mean for the average beneficiary and the longevity of the Social Security Trust Fund.