Next Change in Full Retirement Age – Social Security Payment Will Change Too

The recent proposal to raise the full retirement age (FRA) for Social Security beneficiaries from 67 to 69 has generated considerable debate, primarily focusing on how this change would affect beneficiaries’ retirement benefits. Congressman Brendan Boyle requested that the Congressional Budget Office (CBO) assess the impact of such an increase, analyzing its effects across various demographics, including gender, earnings, and birth decade. The CBO’s findings provide insights into how the proposed age change could alter lifetime Social Security benefits, potentially impacting all future beneficiaries.

Implications of a Higher Retirement Age on Social Security Benefits

The CBO estimates that increasing the FRA would reduce the total lifetime Social Security benefits for all beneficiaries. As the FRA shifts from 67 to 69, retirees would face two main choices:

1. Delay Retirement to Receive Similar Monthly Benefits: If workers opt to delay claiming their benefits by the same amount of time as the FRA increase, they would receive similar monthly payments as under the current system but for a shorter duration.
2. Claim Benefits at the Same Age with Reduced Payments: Should workers choose to start benefits at the same age as they would under the current FRA, they would receive a smaller monthly payment, as their benefits would be reduced to account for the earlier claim relative to the new FRA.

Regardless of which option beneficiaries choose, the overall effect is a reduction in lifetime Social Security benefits, which would improve the Social Security program’s budget by reducing payouts.

Trust Fund Stability and Projected Shortfalls

The CBO’s analysis assumes that Social Security will continue to pay benefits as currently scheduled. However, the program faces looming financial challenges. Without intervention, the CBO projects that the combined Social Security trust funds may run out of funds by fiscal year 2034. At that point, the trust funds would no longer be able to cover the full gap between promised benefits and the annual income from Social Security’s dedicated revenue sources. If this prediction comes to pass, benefit payments would need to be reduced unless other funding sources are secured or program reforms are enacted.

Gradual Increase in the Full Retirement Age

Under the proposed policy, the full retirement age would increase incrementally. For example, workers born in 1965 would see their FRA rise to 67 years and 3 months, with an additional three months added for each subsequent birth year. This adjustment would reach 69 for those born in 1972 or later. Notably, while the minimum age for claiming retirement benefits would remain at 62, individuals claiming benefits more than 36 months before their FRA would face higher reductions in their monthly benefits.

For example:

• Under current rules, a person with an FRA of 67 who claims benefits at age 62 would see a 30% reduction.
• Under the proposed increase to an FRA of 69, the same individual would face a 40% reduction if they claimed benefits at age 62.

Effect on Primary Insurance Amount and Delayed Retirement Credits

The primary insurance amount (PIA) – the monthly benefit a retiree would receive at their FRA – would remain central to calculating reductions for those who claim early. Furthermore, individuals who delay claiming benefits beyond their FRA would continue to receive increased monthly payments until age 72. The proposed increase in FRA would allow for a more extended period to receive larger benefits for delayed claims.

Evaluating the Financial Impact Across Different Demographics

To fully assess how an increased FRA would impact retirees, the CBO examined:

• Lifetime Social Security Benefits as a Percentage of Lifetime Earnings: The CBO analyzed how these benefits would change under the proposed policy across gender, earnings level, and birth decade.
• Annual Retirement Benefits at Age 65: By estimating benefits for workers who would claim at age 65, the CBO provided a clearer picture of the impact on typical claimants.

While raising the FRA could slightly increase government expenditures on disability insurance, it would have no immediate effect on benefits for workers already meeting Social Security eligibility requirements.

Key Points of the Proposed Change

• Lifetime Benefit Reductions: Overall, an increase in the FRA reduces the lifetime value of Social Security benefits.
• Encouragement to Delay Claims: Workers are incentivized to delay retirement to maximize benefits, especially under a system with a higher FRA.
• Trust Fund Considerations: Without structural changes, the Social Security trust fund may run short by 2034, which could lead to across-the-board benefit reductions.

Potential Challenges and Considerations

As the debate around Social Security reform continues, policymakers will need to consider the effects of raising the FRA on different groups within the population. Higher-income earners, who tend to live longer, may benefit more from delayed retirement incentives compared to lower-income groups who might not have the same flexibility in retirement planning.