Social Security makes up much of the income that most retirees earn, and a key component of financial planning for those approaching retirement is to ensure that they can receive as much of the Social Security benefits as possible. However, there has been much discussion about the financial difficulties that the Social Security program has experienced lately, and some have discussed making cuts to ensure retirees and others can continue to receive benefits indefinitely in the future.
However, one thing that surprises many is that we are still working on solutions that lawmakers agreed on when Social Security went through the latest financial crisis. Although this happened in the early 1980s, beneficiaries are still feeling the repercussions today – and this has led to some small reductions in benefits for those who have reached early retirement age in recent years.
A Brief History of Social Security's Last Set of Financial Challenges
Most people understand the basics of why Social Security is struggling. There are now more retirees than ever and fewer workers to support each through social security wage taxes. This is hurting the finances of the program.
However, this is not the first time Social Security has faced this challenge. More than 35 years ago, parliamentarians realized that the payment system according to the use of the program was doomed to failure. Instead, lawmakers have made a number of major changes to the program, including higher wage tax rates, savings in Social Security trust funds, and a gradual increase in full retirement age from 65 to 67.
These solutions are not so different from what today's lawmakers seem to impose. At the time of these early-1980s proposals, no one wanted to penalize those in or near retirement. Therefore, they agreed that the total retirement age would remain at 65 for over a decade. From the age of 62 in 2000, the full retirement age would increase from 65 to 66, increasing in two-month increments each year. Then a 12-year break would keep the full retirement age at 66, until another phase of two-month annual increases came into effect for those who turned 62 in 2017.
For those who turn 62 in 2020, the full retirement age will be 66 2/3. That is 66.5 for those who turned 62 in 2019.
The cost of a two month increase
Two months may not seem like much, and for any individual benefit, it won't make a huge difference. But it will be noticeable.
For example, for workers claiming entitlement at age 62, the impact of the increase will be that they will be forced to claim 56 months earlier than 54. According to the formula governing reductions to claim earlier, this will result in a reduction five-sixths of a percentage point. Now, those who claim in advance will receive 71 2/3% instead of 72 1/2% of the total retirement benefit amount.
This results in a difference of $ 12.50 per month for someone who would be entitled to a monthly benefit of $ 1,500 in full retirement age, based on their work history. Again, it's not a huge amount, but losing $ 150 a year can be a big deal.
No more waiting
In addition, waiting until full retirement age does not solve the problem. When the total retirement age was 66 and a half, workers who retired at 66 2/3 would have received late retirement credits, which would have added 1/3% to their monthly benefit. That would cost another $ 20 a month – but 62-year-olds by 2020 will not be able to do so because of the rising retirement age.
This will not be the last time new retirees face these reductions in their benefits. There are two more planned cohorts of change after 2020, which will have an effect on 62 year olds in 2021 and 2022. If you are in these age groups, it is vital to understand that the benefits you expect to receive will reflect reductions that have been in the works since the years. 80. Failure to consider may leave you wondering why you are not getting as much Social Security as you initially expected.