Increasing The Eligibility Age For Social Security Pensions
Summary
Social Security faces a long-term financing problem. Many young workers believe the problem is so severe they may never receive a Social Security check. The most logical solution to Social Securitys financing problem is to trim promised benefits and increase payroll taxes moderately. A sensible way to reduce future benefits is to increase the early eligibility age and normal retirement age for retirement pensions. This reform is justified by the substantial increase in life spans that has occurred since Social Security was established in the 1930s. An increase in life spans, when the normal retirement age remains unchanged, is equivalent to a sizable increase in lifetime Social Security benefits.
Increasing the retirement age is unpopular with voters. Unfortunately, so are all other reforms that would restore Social Security to solvency, including tax hikes and cuts in the formula for calculating full pensions.
Medicare And Health Benefits
Retiring at age 65 allows individuals to be eligible for Medicare otherwise early retirees will need to budget for out-of-pocket costs to purchase health insurance.
An individual applying for health insurance that complies with the Affordable Care Act pays an average of $456 per month in premiums. By contrast, in 2022, the standard Medicare Part B premium is $170.10 per month and it gets you coverage with a relatively low deductible of $233 a year.
To be well protected, consider prescription drug coverage and perhaps Medigapor Medicare Advantage. Prescription drug coverage premiums average $33 a month in 2022. Medicare Advantage premiums average $19 a month in 2022.
Medigap is private insurance designed to supplement traditional Medicare and prescription drug coverage. Note that if you don’t sign up for prescription drug coverage if retiring at age 65 along with Medicare, you can pay a higher penalty rate for it when you do sign up for the rest of your lifeunless you are covered by an employer drug plan.
Financial experts recommend that your retirement income should be about 80% of your final pre-retirement annual earnings.
Theres A Social Security Spousal Benefit
Marriage is rewarded when it comes to Social Security. One spouse can take whats called a spousal benefit, worth up to 50% of the other spouses Social Security benefit. For example, if your monthly Social Security benefit is worth $2,000 but your spouses own benefit is only worth $500, your spouse can collect a spousal benefit worth $1,000 bringing in $500 more in income per month.
Just as the benefit based on your own work history is reduced if you claim it early, the same is true for a spousal benefit. That 50% figure is the maximum amount that only a spouse who is at least full retirement age is eligible for. Taking the spousal benefit early at, say, age 62, reduces the amount to as little as 32.5% of the higher earners benefit. If you take your own benefit early and then later switch to a spousal benefit, your spousal benefit will still be reduced.
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Are Social Security Benefits Taxable At Full Retirement Age
Your age does not have an impact on whether you will owe tax on Social Security benefits. Depending on your earnings, you may pay federal taxes on Social Security benefits regardless of the age at which you claim.
Social Security benefits are taxed on amounts exceeding the “provisional income” limit set by the IRS. To calculate your provisional income, add up all non-Social Security sources of income, including nontaxable income such as municipal bond interest, and include half of your annual Social Security income.
Single filers earning provisional income between $25,000 and $34,000 and married joint filers earning between $32,000 and $44,000 will owe income taxes on 50% of their Social Security benefits. For single filers with provisional income above $34,000 and married filers above $44,000, up to 85% of Social Security benefits will be taxable.
Will Full Retirement Age Change Again
Though the last legislative change to full retirement age was in 1983, Carroll warns that a future increase in full retirement age is a likely component of a comprehensive Social Security reform package. The culprit for this likely change is our increasing longevity.
More people are living long enough to claim Social Security than in the past, and theyre then spending more years receiving benefits. This makes the program significantly more expensive today than when it was founded, Carroll says. To keep Social Security solvent and provide the same level of benefits, the bar to receive Social Security either needs to rise, taxes have to increase or both.
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When Should You Start Collecting Social Security Benefits
To determine when you should start taking your benefits, its important to understand how much your check is affected by when you claim your benefit. As mentioned before, you can claim your benefit as early as age 62 but reaching full retirement age can secure your full benefit.
So when exactly is the full retirement age for Social Security? That depends on when you were born.
| Year of birth | |
|---|---|
| 65 + 2 months for each year past 1937 | |
| 1943-1954 | |
| 66 + 2 months for each year past 1954 | |
| 1960 and later | 67 |
While the full retirement age used to be 65, changes to the program have increased that age. For example, those born in 1955 now have to wait an extra two months beyond age 66 to claim their full benefit. Someone born in 1959, for example, would have to wait until age 66 and 10 months to get the full benefit. Anyone born in 1960 or later, receives their full benefit at 67.
But some retirees choose to wait even longer. You may wait until as late as age 70 to claim your benefit, but then you must take it. Youll receive a bigger check for doing so.
So, what is the upside to delaying your Social Security benefit after age 62? Your check wont get hit by a serious benefit reduction. Heres how much a $1,000 monthly check will become if you claim your benefit as soon as youre eligible at age 62.
| Year of birth | If you file at 62, benefit reduced by: | A $1,000 check becomes |
|---|---|---|
| $700 |
Working After Full Retirement Age Faq
Retirees may work while collecting Social Security benefits, but those younger than their FRA will be subject to the retirement earnings test .
Under this test, if your earnings exceed a certain limit , you will temporarily forfeit some or all of your benefits. Once you reach full retirement age, your benefit is recalculated and you may receive most of that money back.
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You Want To Start A Business
Some people think of retirement as a time to relax, but you might see it as an opportunity to do things you couldnt do before, such as starting your own business. For example, you might have put off starting a business before because you were afraid you wouldnt be generating enough income. Social Security benefits could provide enough income to let you launch your business. And if your business is successful, the income it generates could be more than enough to offset the future reduction in benefits.
Get Personalized Retirement Benefit Estimates
Choosing when to retire is an important and personal decision. The best way to start planning for your future is by creating a mySocial Security account. With your personal mySocial Security account, you can verify your earnings, and use our Retirement Calculator to get an estimate of your retirement benefits.
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The Downside Of Claiming Early: Reduced Benefits
Consider the following hypothetical example. Colleen is 62 as of 2022. If Colleen waits until age 67 to collect, she will receive approximately $2,000 a month. However, if she begins taking benefits at age 62, she’ll receive only $1,400 a month. This “early retirement” penalty is permanent and results in her receiving 30% less year after year.
However, if Colleen waits until age 70, her monthly benefits will increase another 24% over what she would receive at her FRA, to a total of $2,480 per month.1 If she were to live to age 89, her lifetime benefits would be about $112,000 more, or at least 24% greater, because she waited until age 70 to collect Social Security benefits.2
Planning For Your Future
PEBAs retirement awareness series, , provides you with information that can help you make smart decisions about your financial future. Regardless of how we define retirement awareness, PEBA believes its important to plan for a secure financial future and think about what life will be like after you quit working. We encourage you to use these resources and act now to help secure your financial future.
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You Expect Your Investments To Grow Faster Than The Increased Benefit
If youre the next Warren Buffet, its possible you could do better taking Social Security early and investing the money than you could by waiting to take a larger benefit later. When weighing the best decision, consider the inflation rate, the rate your benefits increase and how much you can expect to earn in your portfolio. Given that benefits increase by 8% per year for each year you wait after full retirement age, however, its hard to outperform that rate of increase in the market. These safe investments do have high returns.
Your Monthly Social Security Benefits Increase The Longer You Wait To Claim
While you can collect Social Security benefits as soon as you turn 62, taking benefits before your full retirement age will spell a permanent reduction in your payments of as much as 25% to 30%, depending on what your full retirement age is.
If you wait until you hit full retirement age to claim Social Security benefits, youll receive 100% of your earned benefits. But you can do even better by waiting to claim your Social Security benefits at age 70 your monthly Social Security benefit will grow by 8% a year until then. Any cost-of-living adjustments will be included, too, so you dont forgo those by waiting. Think of that time as bonus earning years and remember that youd be hard pressed to find those sorts of gains for zero risk during that period anywhere else.
Waiting to claim your Social Security benefits can help your heirs as well. By waiting to take her benefit, a high-earning wife, for example, can ensure that her low-earning husband will receive a much higher survivor benefit in the event she dies before him. That extra income of up to 32% could make a big difference.
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What If I Take Benefits Early
If you choose to take your own Social Security benefit before your full retirement age, be aware that the benefit is permanently reduced by five-ninths of 1% for each month. If you start more than 36 months before your full retirement age, the worker benefit is further reduced by five-twelfths of 1% per month for the rest of retirement.
For example, let’s assume you stop working at age 62. If your full retirement age is 67 and you elect to start benefits at age 62, the reduced benefit calculation is based on 60 months. So, the reduction for the first 36 months is 20% and then another 10% for the remaining 24 months. Overall, your benefits would be permanently reduced by 30%.
Ssa Benefits And Medicare
So lets go back to how your full retirement age and Medicare may interact. The biggest thing is that in the past, at age 65, you both got your SSA benefits and became Medicare eligible. This meant you could use your SSA benefits to help pay for Medicare. However, with the full retirement age being at least a year or more past 65, you need to think carefully about when you take your SSA benefits if you want to use them for Medicare costs.
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The Problem: The Economic Toll From The Pandemic Will Very Likely Affect Social Security Benefits
The initial retirement benefits that Social Security beneficiaries receive in the first year of retirement are determined by a formula that depends, in part, on the growth of average wages in the economy. Due to the economic fallout from the COVID-19 pandemic, the key measure of average wagesthe average wage index is very likely to decline in 2020. As a result, the initial retirement benefits for those who are first eligible to receive benefits in 2022when they reach the age of 62would be significantly less than what was anticipated only months ago, before the pandemic began to exact its economic toll. The effect is very likely to be so significant that workers turning 62 in 2022 would receive initial retirement benefits that are less than those of workers who were born a year earlier and who had essentially the same earnings history. This incongruity is what Social Security experts call a benefit notch. Such a notch would be unfair to the beneficiaries who turn 60 in 2020 and first become eligible to retire in 2022 because benefits are normally expected to grow for each successive cohort of retirees. Moreover, the benefit reduction and notch would have long-lasting consequences, as they not only would affect benefits in the first year of ones retirement but also lower them for every year going forward, as annual benefits are determined by adjusting the initial level for inflation.
How Does Retiring Early Affect My Monthly Benefit
When you retire early, your monthly benefit amount is reduced to reflect that you will be receiving your pension payments for a longer period of time. The amount of the impact depends on the amount of service credit you have, the date you retire, your age and the early retirement factor used.
If you retire with between 20 and 30 years of service credit, your monthly benefit is reduced by a factor that is based on your average life expectancy. The reduction is greater than if you retire with at least 30 service credit years.
If you retire with at least 30 years of service credit, you can choose one of the following options:
- A 3% Early Retirement Factor reduction for each year before you turn age 65
- The 2008 ERF, which provides a smaller benefit reduction but imposes stricter return-to-work rules
Early retirement rules are different for members who are first hired on or after May 1, 2013. At age 55 with 30 years of service credit, your benefit is reduced by 5% for each year before you turn age 65.
The ERFs are subject to change based on State Actuary figures. The administrative factors used in this table are for illustrative purposes only.
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How Old Do You Have To Be To Retire
Full retirement age, or the age you need to be to collect full Social Security benefits, is 66 years and two months for those born in 1955 and will gradually increase to 67 for those born in 1960 or after. How old you have to be to retire comfortably depends on the lifestyle you want to have and how much you have saved. The earlier you retire, the larger the nest egg you will need.
What Does It Mean To Be Vested
Vesting refers to the time period necessary for you to work in order to earn the right to receive a retirement benefit. For example, once you have attained 5 years of service we consider you vested in the system and eligible to receive retirement benefits at age 65. Vesting also occurs at other time periods such as 10, 20, 25 and 30 years, which makes you eligible to receive benefits earlier than age 65.
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What About Taxes On Social Security
Social Security benefits may be taxable, depending on your combined income. Your combined income is equal to your adjusted gross income , plus non-taxable interest payments , plus half of your Social Security benefit.
As your combined income increases above a certain threshold , more of your benefit is subject to income taxâup to a maximum of 85%. For help, talk with a CPA or tax professional.
In any case, if youre still working, you may want to postpone Social Security either until you reach your full retirement age or until your earned income is less than the annual limit. In no situation should you postpone benefits past age 70.
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Working While Receiving Benefits
You may work after you start receiving benefits, which could mean a higher benefit for you in the future. We may withhold some of your benefits if you earn more than the yearly earnings limit. Sometimes people who retire in mid-year already have earned more than the annual earnings limit. However:
- We have a special rule that applies to earnings for one year, usually the first year you begin receiving benefits. This means we cannot withhold benefits for any month we consider you retired, regardless of your yearly earnings.
- After you reach full retirement age, we will recalculate your benefit amount to take into account any months you did not receive benefits because your earnings were too high.
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