PRACTICEMANAGEMENT
HowSocialSecurityRetirementAgeRulesImpactClients
March15,2017
473Views
Changescansubstantiallyreducethevalueofdelayingwidow(er)benefitsfor
survivingspouses.
ThisPracticeManagementarticleisintendedforfinancialadvisorsonly(registeredrepresentativesofbroker/dealersor
associatedpersonsofRegisteredInvestmentAdvisors).
Undertheoriginalrulesf orSocialSecurity,workersbecameeligiblef orabenef ituponreaching
theirf ullretirementageof 65,withaslightincreaseinbenef itsif theworkerdelayeduntilaslateas
age70.
However,thef ull-retirementageitself hasalwaysbeenamovingtarget.Itwaspushedf rom65to
67in1983,andCongressf requentlyraisesthespecterof pushingitoutevenlater—which,if
actedon,coulddiminishtheutilityof aretireedelayinghis/herSocialSecuritydisbursal.What
f ollowsisalookintohowtonavigatetheknownsandunknownsof SocialSecuritypayouts.
AMovingTarget
UndertheoriginalSocialSecurityActof 1935,workershadtoreachage65toreceiveaf ull
retirementbenef it.Thisf ullretirementage,thoughcommonlyattributedtoasimilar“oldagesocial
insurance”programdesignedbyOttovonBismarckinGermanyin1889,wasactuallyrootedinthe
f actthatmanystatepensionsystems—andalsothethen-recentRailroadRetirementBenef it
system—usedage65,andtheCommitteeonEconomicSecurity,whichdesignedtheU.S.Social
Securitysystem,decidedtoadoptwhatwasalreadycommonpractice.
Thef ullretirementageremainedatage65until1983,whentheSocialSecurityTrustwasaboutto
runoutof money,whichwouldhavecausedanimmediatepartialcuttobenef its.Thesubsequent
NationalCommissiononSocialSecurityRef orm,alsoknownastheGreenspanCommissionaf ter
itschairmanAlanGreenspan,recommendedaseriesof adjustmentstothesystemtoextendits
stabilityf oranother50years.
TheendresultwastheSocialSecurityAmendmentsActof 1983,signedintolawonApril20of
thatyear—justaf ewmonthsbef oretheSocialSecurityTrustFundwouldhaverundry—which
madeawiderangeof changestothesystem,includingtheincreaseof f ullretirementagef rom65
to67.
Tosof tentheimpactof theincrease,theGreenspanCommissionrecommendedaphased
approachovertime.Everyonewhowasalreadywithin20yearsof f ullretirementage—
approximatelyage45orolderatthetimethelawwaspassed—wouldgettokeeptheoriginalf ull
retirementageof 65.Thosewhowereage44oryounger—bornin1938orlater—wouldhaveto
acceptahigherf ullretirementage,butthephase-inwouldoccurgraduallyovera22-yearperiod,
withan11-yearhiatusinthemiddle.
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Theendresultwasthatonlythoseaged22oryoungerinearly1983—bornin1960orlater—would
actuallybesubjecttothenewf ullretirementageof 67.
Giventhesebirthyears,everyprospectiveretireesince2005,uponturningage62andbecoming
eligiblef orearlyretirementbenef its,hashadaf ullretirementageof 66—assomeonewhoturned
62in2005wasbornin1943.However,the11-yearhiatusof f ullretirementageadjustmentshas
nowcometoanend,asanyoneturning62in2017wasbornin1955,whichmeanstheirf ull
retirementageisnolongerage66.Instead,itis—waitf orit—age66andtwomonths.
DifferenceBetweenWomenandMen
Thesignif icanceof thef ullretirementageisnotmerelythatit’stheageatwhichretirement
benef itsbecomepayable.
Since1956,womenhavebeenabletostartbenef itsasearlyasage62—implementedatthetime
becausewivesonaveragewerethreeyearsyoungerthantheirhusbandsandwantedtoretireand
startbenef itsatthesametime—andtherulewasexpandedtoallowmentoretireearlyin1961.
However,toremainactuariallyf air,SocialSecuritystipulatedthattakingearlyretirementatage62
wouldreducebenef itsby20%,whichequatesto6.66%peryear,orf ive-ninthsof 1%f oreach
monthearly.
Withtheincreaseinf ullretirementage,though,itsuddenlybecomespossibletoretiremorethan
threeyearsearly.Accordingly,theruleswereadjustedtoprovidethatanyf urtherearlybenef its
beyondthef irstthreeyearswouldbereducedatanadditional5%peryear,orf ive-twelf thsof 1%
f oreachadditionalmonth.Consequently,inrecentyearswhenthef ullretirementagewas66,the
totalearlybenef itsreductionwas6.66%peryearf orthef irstthreeyearsearly,andanother5%
f orthef ourthyearearly,f oratotalreductionof 25%.
DelayedRetirementCredits
Similartothedownwardsadjustmentf orstartingretirementbenef itsearly,there’salsoanincrease
f ordelayingretirementpastf ullretirementage.Originally,thesedelayedretirementcreditswere
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minuscule,atjust1%peryearf orwaiting,but1977SocialSecurityamendmentsincreased
delayedretirementcreditsto3%peryear,andthe1983GreenspanCommissionamendments
ultimatelyphaseddelayedretirementcreditsallthewayupto8%peryear,ortwo-thirdsof 1%per
month,f ordelayingpastf ullretirementage.
Asaresult,withaf ullretirementageof 66,themaximumdelaytoage70wouldresultindelayed
retirementcreditsof 8%peryearx4years=a32%increase.Notably,the8%peryeardelayed
retirementcreditsaresimplycumulative,notcompounded.
Consequences
Thesignif icanceof theincreaseinf ullretirementagef rom66to66andtwomonthsisthattrying
totakebenef itsat66isactuallyanearlybenef itselection,resultingina1.1%reductionf or
startingpaymentstwomonthsbef oref ullretirementage.
Forthosewhowanttostartasearlyaspossible,atage62,doingsoisnolongeradecisionto
takebenef itsf ouryearsearly.Instead,it’sf ouryearsandtwomonthsearly,whichmeanstheage62benef itsreductionisnow25.83%insteadof just25%.Similarly,delayingtothemaximumage
70wouldnotearnf ouryears’worthof delayedretirementcredits(DRCs),butinsteadonlythree
yearsand10monthsof DRCs,f oratotalincreaseof 30.67%insteadof thef ull32%.
Theendresultisthatbenef itscanneverquitebeashighastheywerebef oreatthemaximum,
andatanygivenageSocialSecuritybenef itstakeaslighthaircut.
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Notably,theimpactof arisingf ullretirementagewillcontinuef romheref orseveralmoreyearsas
well.Asnotedearlier,thef ullretirementageisscheduledtogoallthewaytoage67overthenext
f iveyears,suchthatthosebornin1960orlater—i.e.,thosewhostartturning62in2022—willf ind
whenmakingtheirSocialSecuritydecisionsthatanage-62startdateisaf ull30%reduction,while
delayingtoage70isonlya24%increase.
SpousalandSurvivorBenefits
Inadditiontochangestheconsequencesof takingearlyorlateretirementbenef its,thechangein
f ullretirementagealsoaf f ectsspousalandsurvivorbenef itsaswell.
Inthecaseof spousalbenef its,thestandardrulesstipulatethatspousalbenef itswillbereduced
by8.33%peryear—calculatedas25/36thsof 1%permonth—f orthef irstthreeyears,and5%per
yearf oreachadditionalyear.
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Thus,itwasoriginallythecasethattakingspousalbenef itsatage62wasjusta25%reduction—
at8.33%peryearf orthreeyears—whenthef ullretirementagewas65,butstartingatage62,
therehasbeena30%reductionf orthepastdecade,whenthef ullretirementagewas66,and
beginningin2017theage-62spousalreductionwillbe30.83%,climbingtoamaximumreductionof
35%in2022f orthosebornin1960orlater.
Whenitcomestosurvivorbenef its,though,therulesareslightlydif f erent.Survivorbenef itscan
beclaimedasearlyasage60,andthemaximumreductionf orstartingsurvivorbenef itsthatearly
isalwaysaf lat28.5%reduction,appliedpro-rataf romthemaximumretirementagebacktoage
60.
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Thus,intheoriginalsystemwhenthef ullretirementagewas65,startingatage60wasf iveyears
early,andthereductionwas28.5%/5years=5.7%peryear,or0.475%permonth.Atf ull
retirementageof 66,startingatage60issixyearsearly,sothereductionis28.5%/6years=
4.75%/year,or0.396%permonth.Andwhenf ullretirementageultimatelygoesto67,the
reductionwillbe28.5%/7years=4.07%peryear,or0.339%permonth.
Notably,theendresultof theserulesisthatf orsurvivorbenef its,it’snotanyworsetoclaim
benef itsattheearliestage60asthef ullretirementageincreases—unlikef orretirementand
spousalbenef its.Inf act,bystretchingoutthesamereductionoveralongerperiod,itactually
lessensthemonthlyimpactof startingearly—evenasitincreasesthenumberof monthsthatmust
bedelayedtoreachthef ullsurvivorbenef it.
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Ontheotherhand,it’salsoimportanttorecognizethatf ullretirementagef orsurvivorbenef itsis
increasingonadif f erentschedulethanf ullretirementagef orretirementandspousalbenef its.For
thosewhowerebornin1955,wherebythef ullretirementageisrisingto66andtwomonths,the
f ullretirementagef orsurvivorbenef itsremainsage66,andonlyrisesto66andtwomonthsf or
thosebornin1957.
Inturn,thef ullretirementagef orsurvivorbenef itsisn’tonlyage67f orthosebornin1962orlater
—ascontrastedwithretirementbenef its,wheref ullretirementageis67f oreveryonebornin1960
orlater.Asaresult,f orthenextseveralyears,prospectiveSocialSecurityclaimantswillactually
havetodealwithtwodif f erentf ullretirementages:onef orretirementandspousalbenef its,anda
slightlyearlierandmoref avorablef ullretirementagef orsurvivorbenef its.
PlanningImplications
Ultimatelyf ormostretirees,there’snothingtobedoneaboutthechangesinthef ullretirement
age.They’reaf unctionof alawthatwaspassedoverthreedecadesago,whichsimplytookuntil
nowtof inishtheirslowlyphasedimplementation,basedontheretiree’sbirthyear.Andobviously,
there’snowaytochangeyourbirthyear;f orbetterorworse,yougetwhatyougetf romhere.
Inaddition,it’simportanttorecognizethatwhiletheincreaseinf ullretirementagemakesthe
adverseconsequencesof startingatage62alittlemoreseveref orretirementandspousal
benef its,andtheupsideof waitinguntilage70lessadvantageousf orretirementbenef its,it
doesn’tmateriallychangetherelativevalueof waiting,andthebreakevenperiod.
Forinstance,anindividualwitha$1,000permonthretirementbenef itatf ullretirementageof 66
couldhaveenjoyed$750permonthatage62,representinga25%reduction,or$1,320permonth
atage70,a32%increase.Inthef uture,if thatindividual’sf ullretirementagegoesto67,itwillbe
$700permonthatage62,representinga30%reductionf orf iveyearsearly,and$1,240per
monthatage70,a24%increasef orwaitingthreeyears.
However,inbothcases,it’sstillanincreaseof about76%towaitf romage62toage70,andthe
breakevenperiodisstillaboutthesame20-yeartimeperiod.Again,theprimaryimpactof the
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changingf ullretirementageisnotactuallytoalterthevalueof waiting;it’sjusttoslightlyreduce
overallbenef its.
Ontheotherhand,whenitcomestosurvivorbenef its,thechangestof ullretirementage—asit
beginsphasingin,inanothertwoyears—lessensthereductionf orstartingbenef itsearly,which
actuallydoesmakeitlessvaluabletodelay.Inessence,if ittakesanotheryearof waitingtoundo
thef ull28.5%earlyreduction,thenittakesevenlongertoreachthebreakevenperiodwherethe
higherbenef itsoutweighthecostof waiting.
Of course,it’snotablethatwhensurvivorshavetheirownlesserretirementbenef it,itmaybe
advantageoustowaitonsurvivorbenef itsuntilf ullretirementage,andclaimindividualbenef itsin
themeantime,whichcandrasticallyreducethebreakevenperiod.
Nonetheless,atleastonastandalonebasisandwhentheearningstestwon’tapply,laterf ull
retirementagesreducethevalueof delayingsurvivorbenef its,quitesubstantially.
Inmostsituations,though,thekeyissimplytorecognizethechangethatisunderway,andthat
af termorethanadecadeof thestandardage66,thisisnolongerthecase,norisitstandardthat
startingatage62reducesbenef itsby25%,northatwaitinguntilage70increasebenef itsby
32%.
Instead,f orthoseturning62thisyear,theshif tison,withf ullretirementageof 66andtwo
months,a25.8%haircutf orstartingearly,anda30.7%increasef ordelaying.Andthetransition
willcontinueuntil2022,whenallretireesborn1960orlaterhaveaf ullretirementageof 67,a30%
maximumreductionf orstartingearly,andonlyapotentialof 24%indelayedretirementcreditsf or
waitinguntilage70.Andinthecaseof survivorbenef its,thetransitionwillcontinueevenlonger,as
f ullretirementagebecomesdisjointeduntil2024.
—byMichaelKitces
MichaelKitces,CFP,aFinancialPlanningcontributingwriter,isapartneranddirectorofwealth
managementatPinnacleAdvisoryGroupinColumbia,Maryland;co-founderoftheXYPlanning
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Network;andpublisheroftheplanningblogNerd’sEyeView.FollowhimonTwitterat
@MichaelKitces.
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