Q: Whenever you mention the reduction for early retirement, you always say it is “about one-half of 1 percent.” So what is it? Is it one half of 1 percent? Or is it something else? Why the ambiguity?
A: In this case, I think my ambiguous answer is better than the facts. And the facts are these: Retirement benefits are reduced five-ninths of 1 percent for the first 36 months of early retirement and five-twelfths of 1 percent for any additional months.
To explain how we came up with those crazy numbers, I’ve got to give a little history lesson. When Social Security started in 1935, they set the retirement age at 65. And that was it. There were no other options. You had to wait until you were 65 to collect Social Security benefits.
In 1956, Congress decided to let women (and only women) choose early retirement. They said a woman could start her Social Security as early as age 62, if she wanted. And they decided she should get 80 percent of her benefit if she took early retirement. Or to put that another way, they said there would be a 20 percent reduction if someone took benefits at 62. In order to achieve that 20 percent reduction, they had to set the monthly reduction rate at five-ninths of 1 percent. (36 months times five-ninths of 1 percent equals 20 percent.)
Of course, a woman wasn’t stuck with just the two options of taking an 80 percent benefit at 62 or 100 percent at 65. She could start her Social Security at any age between 62 and 65 and get the appropriate reduction for that particular starting age.
And over the years, men got a little peeved when they saw their wives taking early retirement, while they had no choice but to wait until age 65. They must have shared their resentment with their congressional representatives because, in 1961, the law was expanded to let men also start their Social Security at age 62 — with the same five-ninths of 1 percent per month reduction rate.
Things stayed relatively simple for the next couple decades. But the 1983 Social Security amendments included some major reforms. And one of those reforms was to gradually increase the retirement age (for men and women) from 65 to 67.
I don’t have the space to show all the graduated steps here. But people born in 1938 had to be 65 and two months to collect full benefits. People born in 1939 had to be 65 and four months. It kept going up in two-month increments, until it reached a 12-year age 66 plateau for people born between 1943 and 1954. Then the retirement age starts to creep upward again. People born in 1955 have to be age 66 and two months to get full benefits. It keeps going in those two-month increments until the full retirement age levels off at 67 for everyone born in 1960 or later.
And even though Congress raised the full retirement age, they decided to keep age 62 as the early retirement age for everyone. And they also decided that the age 62 reduction rate should be 25 percent for people whose full retirement age would be 66 and 30 percent for people whose full retirement age was 67. And once again, working backward from those decisions, they had to set the per month reduction rate at five-twelfths of 1 percent.
So that’s where we are today. As I wrote, the reduction rate is five-ninths of 1 percent for the first 36 months that benefits are taken before full retirement age, and five-twelfths of 1 percent for all remaining months.
And things get even messier when we start to talk about reduction rates for spouses. (Here I refer to spouses as women — not because I’m sexist, but because 95 percent of spousal benefits are paid to women.)
Once again, things were simple in the early days of Social Security. At age 65, a woman was allowed to collect a benefit as a wife on her husband’s Social Security record equal to 50 percent of his full retirement rate. She had no other options.
In 1956, Congress passed a law saying that a woman could start her spousal benefits at 62. They decided the reduction rate should be 25 percent at age 62. To achieve that, they had to set the per month reduction at 25/36ths of 1 percent.
And then in 1983, when Congress raised the full retirement age, they also raised the retirement age for spouses from age 65 to 67 in the same incremental way, while once again keeping the early retirement age at 62. And for those added years, the monthly reduction rate was set a five-twelfths of 1 percent. So the spousal reduction rate is 25/36th of 1 percent for the first 36 months and five-twelfths of 1 percent for any additional months.
But remember, this reduction is applied to the 50 percent spousal rate. To make this easier to understand, let’s look at this example. Frank’s full Social Security benefit is $1,600 per month. His wife, Mary, who never worked outside the home, wants to start her spousal benefits this year at age 62. Mary was born in 1954. That means her full retirement age is 66 and four months. In other words, she is taking benefits 52 months early.
Her base spousal rate is 50 percent of Frank’s benefit, or $800 per month. Then the reduction factor is applied to that. Her benefit is reduced 25/36th of 1 percent for 36 months, or 25 percent. Then it is reduced five-twelfths of one percent for an addition 16 months, or about 6.7 percent. That is a total reduction of 31.7 percent. Or to turn that around, she is due 68.3 percent of her normal spousal rate — about $546. Or to put that yet another way, she is getting about 34 percent of her husband’s full retirement rate of $1,600.
I can tell you this: I got a bad headache figuring out all these numbers and percentages and writing them down. I can’t imagine how your head must be hurting and spinning reading this stuff. So do you see why I try to keep things simple? I just like to say that retirement and spousal benefits are reduced roughly one half of 1 percent for each month they are taken early.
