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Is the Social Security Reduction for Early Retirement Still Right?


Monthly Social Security benefits claimed at age 62, rather than 65, are reduced by about 20 percent. The goal of the reduction is to ensure that early retirement does not result in any additional cost to the system. When the reduction was set over 50 years ago, a worker claiming at 62 received benefits for about 20 percent longer than someone claiming at 65. Since then, life expectancy has risen, so that claiming at 62 today means receiving benefits for only 15 percent longer. How can a 20-percent reduction still be right?

The original legislation creating the Social Security program did not allow workers to claim benefits before the program’s eligibility age of 65. In 1956, however, Congress gave women the option to retire as early as age 62 on a reduced monthly benefit, so that married women, who were typically younger, could retire and claim benefits at the same time as their husbands. Congress made the option available to all women, so as not to discriminate against unmarried women. Congress extended the same option to men in 1961, during a recession that made early retirement an attractive policy response.

In 1960 the average life expectancy at age 65 was about 15 years; therefore a worker who claimed at 62, as opposed to 65, collected benefits for three additional years or 20 percent longer (18 years /15 years). If an individual were receiving benefits for 20 percent longer, the only way to keep the cost constant would be to pay 20 percent less each year.

Life expectancy at 65 has increased significantly in the last 50 years. It is now 20 years,    so the worker who claimed at age 62 instead of age 65 would receive benefits for 15 percent longer (23 years/20 years). So why shouldn’t the benefits be reduced by 15 percent to keep costs constant?

The answer is that the cost to the government of providing benefits early is the difference in the present value of expected lifetime benefits starting at age 62 and at age 65. That calculation means that the cost depends on interest rates as well as life expectancy. Real interest rates have increased since 1960, and higher rates shrink the cost of a benefit stream claimed at 65 more than a benefit stream claimed at 62.

The rise in interest rates has largely offset the increase in life expectancy. Calculating the cost of lifetime benefits using the interest rate the Social Security Administration projects over the long-term, 2.9 percent, the cost of benefits claimed at 62 would be 96 percent of the cost of benefits claimed at 65. It suggests that the reduction for early retirement is a little high, but not bad.

In short, the actuarial reduction factor for early retirement, set by Congress over 50 years ago, has proved to be remarkably durable. Despite rising longevity and changes in interest rates, the cost of lifetime benefits claimed at 62 remains reasonably close to the cost of lifetime benefits claimed at 65.



Comments (5 of 16)

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    • The longer people remain in the workforce, the longer they tie up jobs that could go to younger people. Other countries have younger ages than the U.S. to begin drawing a government payment that allows them to leave the work force and make room for others. Pensions are largely a thing of the past, many people have little retirement savings because they didn’t have much income to save from. Costs of college education are extremely high for the middle class families who are not eligible for government grants and subsidized loans, so this tab is theirs as well if they want their children to continue education post-high school. Retiring “early” at 62 seems a more ludicrous word the closer you get to that number – I have worked since I was 14 (summers, vacations, babysitting at 12, other part-time jobs when I was able), worked through college, worked without pay as a parent while raising the next generation, worked part-time and full-time as an adult. We do the work for the money, most of us, not because of professional fulfillment, and after a while we are all tired. My father-in-law has three pensions from different stints as a corporate executive, but we have only 401(k)s from our time with employers, only trivially matched on a small portion of our personal investment in the accounts. Social Security of course provides multiple pieces of protection for taxpayers: Social Security payments at retirement, disability payments if needed, payments to support suriving children until 18 if the taxpayer dies. We pay this tax on our incomes during our working years, to support those who are already receiving benefits in their later years. It is not “our money” any more than the federal income taxes we paid over the years, but these taxes support the programs that we will gain access to when we are old enough, and 62 is seeming plenty old enough to me today, even though it is a ways off.

    • Alicia you should know better. The current reduction at 62 is almost 30%, scheduled to rise gradually to 33% by 2022. Full retirement age is now 66 and will be 67 in 2022. Folks should be asking how much more they can get if they wait until 70, not retiring early… unless they have no other choice.

    • Unless social security benefits are inheritable to the next generations within a family, there is NO good reason to delay taking benefits. Inb my case, I do not have children, but I do have a(n) unmarried life partner and he can not legally claim any access to my social security benefits if I pass away before he does. So, why should I drain my savings and 401-k (which he CAN inherit) instead of taking my social security at the earliest possible age and using that to “save” my savings and 401-K for longer/later ? The lesson is that with any bad public policy, you will have bright people figuring out how to optimize their own gain from that bad system. A system that favors specific classes of people (man/woman married couples; particularly where one of them was an un-working spouse) is just plain bad public policy. Making the benefits die with the primary beneficiary (i.e., not adding them on for the adult children of the primary beneficiary) is bad public policy. As I said, make bad public policy and most of us will figure out the ways to get the most out of that poorly-designed system in a way that benefits us each optimally at the overall expense of “the system.”

    • As a potential near-term retiree, the issue that has not been calculated in most early retirement formulas is the effect of income tax on the combination of Social Security benefits and a moderate 401K or IRA withdrawals.
      It’s worth considering how an earlier start to Social Security may be able to keep one’s taxable income in a lower bracket. This functions as a type of income averaging to achieve lower tax rates.

    • Social Security is supposed to be one leg of a three legged financial stool. Savings and Pensions are supposed to be the other two. Pensions are becoming a thing of the past and savings are close to receiving negative interest, despite the author’s comments that interest rates are going up. It’s a delicate dance that people have to do to retire, at any age, in this country. Why do other countries have stable finances and offer superior benefits than we receive now? ANSWER: Their priorities aren’t aimed at rescuing financial con artists and being involved in questionable international adventures.

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