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CCH® PENSION — 3/6/08

Increases In Social Security Retirement Age Impact Retirement Decisions

From Spencer's Benefits Reports: More people are postponing their retirement date as a result of changes in the Social Security retirement age and the taxation of wages earned from ages 65-69, according to a study published in Social Security Bulletin Vol. 67, No. 2, released in February 2008. The average Social Security retirement age for men born in 1937 was slightly above 63.2; while for men born in 1940, it was slightly above 63.4. For women born in 1937, the average Social Security retirement age was slightly above 63; while for women born in 1940, it was 63.2.

The gradual postponement of the full benefits retirement age (FRA) beyond age 65 not only increases the age when a retiree can begin to receive full Social Security benefits, but also causes a greater reduction in benefits for people who retire early at age 62. The results are “fairly rudimentary,” the study noted, because data from only three of the affected age groups has been available (people born in 1938 (FRA = 65 + 2 months), 1939 (FRA = 65 + 4 months), and 1940 (FRA = 65 + 6 months)). Those people born in 1937 represented the base year for comparison because that was the last year for which the FRA was age 65.

The changes in the FRA have shifted the spike in retirements that always occurs when full (100%) Social Security benefits can be received. Of those born in 1937, 18% of men and 12% of women claimed benefits at age 65, when they would receive full retirement benefits. Of those born in 1940, the retirement “spike” moved out to age 65 and 6 months, resulting in 16% of men and 10% of women claiming full benefits at that age.

In addition to increasing the FRA, the 1983 amendments to the Social Security Act decreased the amount of benefits that an individual would receive upon retirement at age 62 (by 5/9 of 1% for the first 36 months before FRA plus 5/12 of 1% for any additional months). As a result, someone who was born in 1940 and retired at age 62 would receive a benefit that would be 77.5% of the full Social Security benefit, compared to a benefit that would be 80% of the full Social Security benefit for someone who was born in 1937 and retired at age 62.

The study found some decline in the number of people retiring at age 62. Of those born in 1937 with no increase in the FRA, 42% of men and 59% of women claimed early retirement benefits at age 62. Of those born in 1940 (when the age 62 benefit would be 77.5% instead of 80%), 40% of men and 45% of women claimed early retirement benefits at age 62.

Another factor in the retirement decision was the elimination of the earnings test for individuals receiving Social Security benefits and wage income between FRA and age 69. Beginning in 2000, Social Security benefits no longer were reduced after the FRA because the recipient continued to receive taxable wages. The study concluded that the elimination of the earnings test caused two reactions: (1) people who might have retired early were likely to put off receipt of Social Security benefits until their FRA, when their benefits would not be reduced; and (2) people who might have postponed receipt of Social Security benefits until age 69 or 70 to avoid benefit reductions actually began receipt of their benefits at their FRA, or shortly thereafter.

For more information on the study, entitled Have People Delayed Claiming Retirement Benefits? Responses to Changes in Social Security Rules, visit http://www.socialsecurity.gov/policy/docs/ssb/v67n2/v67n2p1.pdf.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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