When I’m sixty-four?
–“When I’m Sixty-Four” by The Beatles (1967)
Full Retirement Age (FRA), which is the age at which you’re entitled to receive 100% of your Social Security monthly retirement benefit, increased from 65 to 66 as a result of the 1983 Amendments. Now, FRA is being phased in to increase to 67 for individuals born in 1960 and later. This is reasonable given the fact that life expectancy has increased, from about 61 in 1935 when the Social Security Act was written and 65 was established as the retirement age, to 79 today.
Widening gap between early and full retirement age
While FRA has gradually increased from 65 to 67 depending on year of birth, there has been no change in Social Security’s eligibility, or “early retirement” age. Early retirement was introduced to the Social Security system in 1956 when retirement-benefit eligibility was reduced from age 65 to 62 for women and was extended to men in 1961. Individuals who elected to apply for benefits at 62 received 80% of the amount they would receive if they waited until 65.
As a result of FRA increasing from 65 to 66 for individuals born between 1943 and 1954, those electing to begin their benefits at 62 receive 75% of the amount they would otherwise receive if they wait until 66. Monthly benefits will be reduced another 5% to 70% for those born in 1960 and later who choose to begin receiving income at age 62 instead of at their FRA of 67.
While there was originally a three-year spread and 20% benefit reduction between age-62 eligibility and FRA of 65, the gap is widening as a result of the increase in FRA. The spread became four years when FRA was raised to 66 with an associated 25% benefit reduction. If unchanged, it will increase to five years for people born in 1960 and later with a 30% benefit reduction for those choosing to apply for retirement benefits at 62.
More than 50% collect retirement benefits before age 64
Per the Center for Retirement Research’s May, 2015 analysis of unpublished Social Security data, 60% of women and 50% of men signed up for retirement benefits at age 62 in 2005. Age-62 applicants declined to 48% of women and 42% of men in 2013. Another 8% of women and 7% of men applied for retirement benefits at age 63, resulting in 56% of women and 49% of men applying for benefits before 64.
Although there’s increasing awareness of the permanent consequences of applying for Social Security benefits at age 62 vs. waiting until at least FRA as evidenced by fewer individuals making this election, the percentage remains high.
Increasing eligibility age would improve retirement preparedness
Study after study shows that one of the biggest mistakes people make is starting to receive their Social Security benefits too early. While there are those who need to start collecting at age 62 for financial or health reasons, others do so without understanding the long-term financial consequences of their decision for themselves, their spouses, and family. Many of these individuals subsequently regret not waiting until their FRA or later when their monthly benefit would increase by 8% per year for each year that they delay their start date until age 70.
The following are three of the ways in which retirement preparedness would be improved if the Social Security eligibility age is increased from 62 to 64.
1. Larger lifetime benefit for surviving spouses
One of the biggest beneficiaries from increasing the eligibility age from 62 to 64 would be surviving spouses of individuals born in 1960 or later who are dependent on their deceased spouses’ Social Security benefits. These individuals inherit their deceased spouse’s monthly benefit assuming that the amount is greater than their own. A surviving spouse would receive 80% vs. 70% of his/her deceased spouse’s FRA plus cost of living adjustments, or COLAs, for the rest of his/her life assuming that the deceased individual was born in 1960 or later and defers his/her start date from age 62 to 64.
2. Potentially higher benefit for recipients
Increasing the eligibility age from 62 to 64 could potentially add two years of earnings to the calculation of retirement benefits. Social Security uses the highest 35 years of Social Security earnings to calculate benefits. Monthly income could increase if age 62 and 63 earnings years rank among the top 35.
3. Potential additional earnings and increased retirement savings
Retirement preparedness would also be improved to the extent that an increase in Social Security eligibility age results in a push back of one’s retirement date. A lot of people time their retirement to coincide with their Social Security start date. Individuals who do so would postpone their retirement if their start date is deferred from 62 to 64. This would enable them to earn two addtional years of income and potentially increase retirement plan contributions and other savings.
Not to be overlooked, additional earnings years would translate to additional payroll taxes that could be used to extend the sustainability of the Social Security system. The combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) trust funds are projected to be depleted in 2034 per the recently-released Social Security Trustees 2016 report. Increasing the eligibility age from 62 to 64 would increase reserves which would push out the year in which funds are projected to be depleted.
Exception for unemployed not by choice or those in questionable health
Life expectancy has increased substantially since the early retirement age of 62 was introduced in 1956. While an increase in the Social Security eligibility age from 62 to 64 for those born in 1960 and later makes sense for most people, it would be problematic for those who are unemployed not by choice or are in questionable health. An exception could be carved out for these individuals if the change is made.
The introduction of age 62 as an “early retirement” age for Social Security recipients was a relatively new phenomenon when the Beatles released When I’m 64 on their Sgt. Pepper’s Lonely Hearts Club Band album in 1967. The Fab Four’s vision of life at 64 is a far cry from reality for most people who have achieved this milestone.
Given the fact that full retirement age is being phased in from the original 65 to 67, longevity has increased significantly since benefit eligibility at 62 was established 60 years ago, and we want to avoid Helter Skelter in our venerable Social Security system, while we probably won’t Twist and Shout, we need to Come Together and answer the question, “Should the Social Security eligibility age be increased from 62 to 64?”. Ob-La-Di, Ob-La-Da.
Disclosure: Bob Klein is an avid Beatles fan.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.