Claiming age has a significant impact on Social Security benefits for retired workers.
In 2022, the National Bureau of Economic Research (NBER) published a paper titled “How much lifetime Social Security benefits do Americans have left?” The answer to that question was surprising.
The authors determined that more than 90% of workers between the ages of 45 and 62 optimize their lifetime benefit income by claiming Social Security at age 70. However, fewer than one in ten people actually wait that long, the authors estimated, resulting in a median lifetime loss. Earn more than $225,000.
In short, workers are paying a high price for overlooking two Social Security rules regarding how age claims affect benefit payments. Read on to learn more.
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How are social security benefits determined?
A recent survey from the National Retirement Institute found that more than half of adults don’t know exactly how to get the most out of their Social Security benefits. That misunderstanding can cost you hundreds of thousands of dollars in retirement benefit income. In fact, an NBER publication estimates that if the median worker between the ages of 45 and 62 fails to make the most of their Social Security income, their lifetime purchasing power will decrease by 10%.
But workers who understand how Social Security is calculated, especially how claim age affects payments, can make informed decisions. In this scenario, many people may choose to claim early and receive a small benefit, but the reduction in purchasing power would be voluntary rather than the result of a misunderstanding.
Social Security retiree benefits vary based on lifetime earnings and claim age. First, inflation-adjusted earnings are run through a formula to calculate each worker’s Principal Insurance Amount (PIA). PIA is a benefit that workers receive when they claim Social Security at Full Retirement Age (FRA). FRA is 67 years for those born after 1960.
Second, PIA is adjusted for early or late claims. Retirement benefits can begin at age 62, but workers who start Social Security before FRA will have their benefits reduced to less than 100% of their PIA. Similarly, workers who start Social Security after FRA receive increased benefits, meaning more than 100% of their PIA.
Overlooked Social Security Rule That Could Add 77% to Retired Worker Benefits
We said that collecting Social Security earlier than FRA will reduce your benefits, and starting Social Security later than FRA will increase your benefits. That’s when I discovered an overlooked Social Security rule that could increase benefits for retired workers by up to 77%. The regulations in question explain how age claims correlate with benefit reductions and increases.
Rule 1: If a worker claims Social Security before full retirement age, benefits are reduced by five-ninths of a percentage point (approximately 0.55%) per month for up to 36 months. After that, your benefit will be reduced by five-twelfths of a percentage point (approximately 0.42%) each month. Rule 2: Workers who claim Social Security after full retirement age earn a delayed retirement credit that increases benefits by two-thirds of a percentage point (approximately 0.67%) per month. Delayed retirement benefits stop accumulating at age 70, so there’s really no point in claiming them later.
Let’s apply these rules to a hypothetical scenario. Last year, the average PIA for newly recognized retirees was $2,042. Using this number, a hypothetical worker born after 1960 who claimed Social Security at FRA would receive $2,042 per month. Here’s how this number would change if they claimed at ages 62 and 70.
If this worker were to file a claim at age 62, they would receive $1,429 per month. This is because they started Social Security 5 years before FRA and their PIA decreased by 30%. To elaborate, 36 months multiplied by 5/9ths of a percentage, then 24 months multiplied by 5/12ths of a percentage equals 30%. If a hypothetical worker files a claim at age 70, they would receive $2,532 per month. This is because they started Social Security three years after FRA and their PIA increased by 24%. To elaborate, 36 months multiplied by two-thirds of the percentage is 24%.
The amount will vary depending on your individual circumstances, but the percentage will remain constant. In other words, workers can increase their retirement benefits by 77% ($2,532 divided by $1,429) by claiming Social Security at age 70 instead of 62. Unfortunately, most people misunderstand or overlook Social Security’s regulations regarding the claiming age. In fact, more than 90 percent of new retiree workers started enrolling in Social Security before they turned 70 last year.
