Impact of Retirement Age on Social Security Pensions


Impact of Retirement Age on Social Security Pensions

Sherman Hanna, 05/06/2000


What is the impact of the retirement age on Social Security pensions? I used the online retirement calculator (http://www.ssa.gov/retire/AnypiaApplet.html) for a scenario of someone born in 1946, who started working under Social Security in 1964, with a number of years of low wages, then assumed that from age 40 on the person made $70,000 per year, near the maximum level for which a Social Security pension would be calculated. The table below shows the estimated monthly Social Security pension (for one worker)









retirement age

pension/month

pension % of last wage

retirement

age

pension/ month

pension % of last wage

55

1107

18.98%

69

2079

35.64%

62

1206

20.67%

70

2227

38.18%

65

1525

26.14%

71

2241

38.42%

66

1645

28.20%

72

2253

38.62%

67

1788

30.65%

80

2283

39.14%

68

1933

33.14%

85

2283

39.14%

Whenever the worker retires, the pension shown above would stay the same (in real terms) as long as the worker lived. The only change might result from claiming dependents, e.g., when a non-working spouse turned 62.

If the worker retired at age 55, the pension would be zero until age 62, then the pension would be 1107 per month forever. Note that the pension increases as the retirement age increases from 55 to 62. This is the result of higher wages being averaged in — each extra year of $70,000 replaces a much lower year, e.g., $2,000 at age 18. (Social Security uses the highest 35 years of wages, with earlier years indexed, so that, for instance, $20,000 in 1967 would be averaged in as $74,170.)


As the retirement age increases from 62 to 70, the pension increases for two reasons:

1.Social Security benefit increase formulas — penalties from retiring before the “full retirement age (65, 66, or 67 depending on year of birth) and extra for retiring after the full retirement age. The extra amount stops at age 70 — there is no benefit in the formula from retiring after age 70.


2. Bringing in years of higher wages (assuming that the worker continues to make a high wage in each extra year worked. This is possible with some highly paid workers and self-employeed workers, and is assumed in the table above. However, it is not always the case.) A worker will not be penalized for working longer at low wages, as Social Security will average in the highest wages in relative terms — whether they were last year or 30 years ago.


As the retirement age increases from 70 to 80, the pension increases ONLY because of the assumption that higher wages in those extra years of working are replacing low wages in the calculation.


There is really no reason why someone should not start collecting Social Security when the full retirement age is reached, even if the worker is continuing to work full-time.