Q: I’ve noticed that when you are talking about reductions in Social Security benefits for early retirement, you always say the reduction will be about one-half percent. Why do you say “about?” Is it one-half percent? Or is it something else?
A: It is “something else” all right! I will attempt to explain.
You are right that I almost always throw in that word “about.” As in this statement: If you take Social Security benefits before your full retirement age, your benefit will be reduced about one-half of one percent for each month you are under that age.
The actual reduction is five-ninths of one percent for some months with the possible addition of a five-twelfths of one percent reduction for other months. (Now do you see why I like to keep it simple and just say about one-half of one percent?)
How the reduction factor got so convoluted makes for an interesting story.
Things were much simpler when Social Security began and there was only one retirement age: 65. In other words, you had no other option than to take 100 percent of your Social Security at age 65.
But then it got a little more complicated when Congress chose to offer people the option of taking reduced benefits as early as age 62. They did this for female retirees in 1956 and for male retirees in 1961. They decided that people who took benefits at 62 should get a 20 percent reduction in their monthly payments. So with that benchmark, it was easy to figure out the amount of monthly reduction for folks who might want to retire sometime between age 62 and 65. There are 36 months between those years. To get to a 20 percent reduction at 62, the reduction factor works out to five-ninths of one percent per month.
Then in the 1980s, Congress raised the retirement age from 65 to 67. And they did it in gradual steps. People born in 1938 had to be 65 and two months to get full benefits. People born in 1939 had to be 65 and four months. This went up in two-month increments for each year of birth until we hit an age 66 plateau for folks born between 1943 and 1954. People born in 1955 will have to be age 66 and 2 months to get full benefits. And once again, the full retirement age will go up in two-month increments for each year of birth afterward until it levels off at 67 for people born in 1960 and later.
But Congress decided to keep the early retirement age at 62, no matter what the full retirement age might be. They further decided that there should be a 25 percent reduction for early retirement for folks whose full retirement age is 66; and 30 percent for folks whose full retirement age will be 67.
And because some people might want to retire between ages 62 and whatever full retirement age was assigned to their year of birth, they had to come up with a monthly early retirement reduction. Once again, it was a matter of doing the math. And doing the math, you come up with a five-twelfths of one percent reduction for each additional month between age 65 and whatever full retirement age is appropriate. So that’s why today the retirement reduction is five-ninths of one percent for the first 36 months and five-twelfths of one percent for each additional month, up to the maximum of 60 months.
So far, we’ve been talking about retirement benefits. But reduced benefits are also available to spouses. And a similar pattern of complicated reduction factors is part of their history, too.
Again, in the early days of Social Security, a spouse (and back then, a “spouse” was always a wife) could get 50 percent of her husband’s Social Security benefit at age 65. In 1956, Congress said that wives could take reduced benefits as early as age 62. (Later, they would do the same for husbands.) They decreed that the reduction at age 62 would be 25 percent of that 50 percent reduction, or in other words, 37.5 percent.
But once again, some people might want to start their spousal benefits between age 62 and 65. So doing the necessary math, you would learn that a spousal benefit is reduced 25/36ths of one percent for each month a benefit is taken before age 65.
And as with retirement benefits, when Congress raised the full-retirement age for retirees, they also raised the age at which a spouse could draw full benefits in a like manner. In other words, it is age 66 now, and will be going up to 67 in annual two-month increments beginning with people born in 1955 or later.
Congress decided that the spousal reduction would be 30 percent of the basic 50 percent benefit, or 35 percent, for people whose full retirement age is 66 and 35 percent of the basic 50 percent benefit, or 32.5 percent, for people whose full retirement age is 67. So the monthly reduction factor for spousal benefits comes out to 25/36ths of one percent for the first 36 months and five-twelfths of one percent for each additional month, up to the maximum of 60 months.
And finally, the reduction factor for widows and widowers is so confusing even I can barely understand it. The reason for the confusion grows out of this political maxim: “Don’t mess with a widow’s Social Security check!” Even as a widow’s full-retirement age goes up, Congress decided to leave the earliest eligibility age reduction (age 60) at the same level: 28.5 percent. In other words, a widow who takes benefits at 60, no matter what her full retirement age, will get a 71.5 percent benefit.
But some widows might want to start benefits between 60 and their full-retirement age. And there is a convoluted formula to determine the rate payable. Just as an example: A woman born in 1950, whose full retirement age is 66 and who chooses to take widow’s benefits at 62, would get a 19 percent reduction, or an 81 percent benefit. But a woman born in 1961, whose full retirement age is 66 and 10 months and who chooses to take widow’s benefits at age 62, would get a 20.2 percent reduction, or a 79.8 percent benefit.
