Photo credit: jb
With all the talk about how Social Security is running out of money (or will be, currently projected at 2035), one of the topics that often comes up is the age limits for benefits. As you’re probably aware, the Full Retirement Age (FRA) has been adjusted upward from the original age 65, gradually to age 67 for folks who were born in 1960 or later. This upward adjustment was put into place with the 1983 amendments, ostensibly to reduce the outflows for the system.
With that adjustment in place, and the resulting benefit that the system has received from making that change, you might wonder why some of the other age limits have not been changed. Specifically, why has the early retirement age remained at 62, and the upper limit (maximum benefit age) has also remained set at 70?
I don’t have any definitive information to back this up, but I think there may be a reason behind the lack of change in these upper and lower limits. Look at how the lower limit interplays with the FRA. When the FRA was 65, as it was for folks born prior to 1937, the maximum amount of reduction that could occur by taking benefits at the earliest age of 62 was 20%. As FRA has increased, the amount of time for reduction (the time between age 62 and the increased FRA) has also increased. This resulted in an increase in the amount of reduction for folks starting benefits at the earliest age, to 30% for those with an FRA of 67.
Since a large percentage of folks will inevitably file for benefits at the earliest possible age, leaving the early filing age at 62 results with a high percentage of people receiving benefits at a lower and lower rate. The result is a lower outflow from the system, which extends the period of time before the system starts running out of money.
At the other end of the spectrum, increasing the FRA while leaving the maximum benefit age the same results in a reduced amount of time for Delayed Retirement Credits (DRCs) to accrue. For folks with FRA of 65, the maximum amount of DRC that could accrue was 32.5%. Given changes to the formula, this amount remained fairly constant for the increase up to FRA of age 66. Once that FRA is in effect, the DRC was set at 8% per year, with no change as the FRA increased. So when the FRA increases gradually to age 67, the maximum DRC will correspondingly reduce to 24%.
As the FRA increases, the maximum reduction increases by leaving the early retirement age at 62. While at the same time, the maximum delay credit reduces by leaving the maximum age at 70. The system benefits more by leaving these ages set at 62 and 70 than if they were adjusted, at least in the short term.
I don’t think there’s anything nefarious about this, it’s just another way that the system has benefited from those changes to the FRA.
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IRA, Social Security, income tax, and all things financial
