Social Security normally takes effect at a person’s “full retirement age” (FRA)—the age at which it is projected they will stop working and retire. This age has steadily increased since 1935, the year that Social Security was founded; it is now between sixty-six and sixty-seven, depending on the year that the claimant was born.
The Social Security Administration allows Americans to claim their benefits before the FRA. However, to compensate for the extra years of payments, they also take a certain percentage of the monthly benefits away. The longer before FRA someone claims their benefits, the larger the pay cut will ultimately be.
The earliest possible date that someone can claim their Social Security benefits is at the age of sixty-two. At this age, however, the highest possible benefits one could receive per month would be around $2,300—and the vast majority of benefits will be significantly lower.
It works like this. A person’s Social Security benefit is calculated based on his or her income during the thirty-five most highly paid years of the person’s career. A percentage of this income directly translates to one’s base benefits that they would receive if they filed for Social Security at their FRA age.
Because Social Security is primarily targeted toward lower- and middle-class Americans, the Social Security Administration has imposed a payroll tax limit on one’s earnings—currently set at $142,800. This means that for incomes over $142,800 per year, one’s Social Security contribution cannot get any larger; a high school principal receiving $150,000 per year and a Wall Street executive receiving $20 million per year will receive the same Social Security payment—of roughly $3,000 per month if the benefit is claimed at FRA age.
However, if the benefit is claimed at the age of sixty-two instead, the $3,000 per month is cut by 30 percent, to $2,300 per month. This represents the highest possible Social Security payment; the average Social Security payment is $1,500 per month, meaning that claiming it at sixty-two would decrease it to around $1,050 per month, or $12,600 per year. This number is below the poverty line ($12,800 per year) in the United States.
Therefore, pulling one’s benefits out at sixty-two is, over the long run, likely to be an expensive mistake. However, it is an expensive mistake that roughly one in five Americans commit; roughly 20 percent of Americans signed up to receive their benefits at age sixty-two. While there are a few good reasons to do so—if, for instance, a person is in poor health and does not expect to live long after retirement—most Americans would probably be better off waiting until full retirement age to claim their payments.
Trevor Filseth is a current and foreign affairs writer for The National Interest.