Social Security Retirement Benefit Confusion

June 21, 2010

We’ve heard this one before, but the latest version came with a twist. Folks are thinking they have to work until age 70 to receive their full Social Security benefit. The reason has something to do with those giant alligators living in your city’s sewers.

What do alligators have in common with Social Security? In this case, it’s a matter of urban legend. The latest story we’ve heard about why your Social Security benefits won’t click in at full value until age 70 is that it has to do with a loan the U.S. made to Mexico during the first Bush administration. Apparently the loan wasn’t repaid and now the government, having lost all that money, is forced to cut back on Social Security payments unless you postpone taking benefits until you’re a septuagenarian. Or something like that. It’s a bunch of hooey, of course. But there’s a serious confusion behind the ludicrous story, and we need to understand where it comes from.

Normal benefit at full retirement age

Begin with the fact that your normal retirement benefit is payable beginning when you reach full retirement age. This age depends on your year of birth. For people born in 1943 through 1954, it’s age 66. Add two months for each year after that (for example, it’s 66 years and four months for people born in 1956) until we reach 1960. People born that year, and every year thereafter, will  reach full retirement age when they turn 67. Under current law, no one has to wait until age 70 to receive their full benefit, and no one is proposing that this will be true in the future.

Starting early or late

The law recognizes that different people have different needs, so we aren’t all required to start taking our Social Security benefit at full retirement age. You can start receiving your Social Security benefit any time after you reach age 62. If you start early, though, your monthly payment will be smaller than if you waited until your full retirement age, when you qualify for the full benefit you earned.

You can also boost your monthly payment above the normal amount by delaying your start date even after you reach full retirement age. Postpone your start by one year and you’ll get a permanent increase in your monthly payment that will more than make up for that year of forgone payments if you live long enough. Wait another year and your monthly payment will be still greater. These increases continue until you reach age 70, after which the rules provide no further boost in the monthly benefit.

Clear enough, except when it isn’t

Okay, that’s reasonable, but here’s the problem. Every year the Social Security Administration sends each of us a statement showing our earnings history and projected benefits. The statement estimates the amount you’ll receive if you start taking payments at full retirement age and also the amount you’ll receive if you wait until age 70, or retire early, at age 62. This is good information that can be helpful in planning your retirement.

If you don’t understand the reason for the different payment amounts, though, it’s easy to compare the number at full retirement age with the larger number for age 70 and reach the incorrect conclusion that you’re being denied your full benefit if you start before age 70. The annual statement we receive from the Social Security Administration doesn’t make it clear that the age 66 benefit is the full benefit you’ve earned, and the age 70 benefit is an increase above that amount. And that means there are plenty of people thinking something has been taken away from them, and coming up with fanciful reasons how that might have happened.

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