The age at which a person can claim full retirement benefits from Social Security has gradually increased from 65 to 66. As the earliest possible date to begin receiving benefits -- with an early claim penalty reduction -- has remained fixed at 62, the consequences of taking benefits early have changed. At the time of publication, somebody reaching the age of 65 and claiming benefits would only receive about 93 percent of the amount available, compared to what he would receive by waiting until age 66. This penalty applies to all payments for the rest of his life.
Full Retirement Age
The full retirement age is the age at which a person becomes eligible to receive her full Social Security retirement benefits. It is not necessarily the age at which she chooses or is forced to stop working. It is also not necessarily the age at which her own privately funded retirement plan will begin to pay benefits.
Traditionally, 65 has been seen as the retirement age in the United States. However, the full retirement age in the United States is now on a sliding scale, meaning that the later the year of birth of a person, the later he will reach the full retirement age. This is designed to reflect the fact that average lifespans are increasing. The year 2009 marked an important milestone, as it was the first year in which people had to be age 66 to claim full retirement benefits, rather than 65 years and a number of months. The full retirement age will remain at 66 -- with a steadily increasing number of months -- until 2027, when the age is scheduled to reach 67.
The increasing retirement age has important consequences beyond the simple delay in receiving benefits and implications for how long people work. It also affects the system by which a person can choose to begin claiming benefits from the age of 62 but will receive a reduced level of payment. As the figure of 62 years has remained constant, the penalty for early claim has thus increased.
Somebody born in 1937 or earlier was able to take full benefits from the age of 65. Taking early benefits from the age of 62 -- four years early -- carried a penalty of 20 percent. Somebody born between 1943 and 1954 can take full benefits from the age of 66.
If somebody starts claiming benefits at a point between the age of 62 and the full retirement age, the penalty is adjusted proportionally depending on the precise age at which the benefit payments begin.
Somebody who was born in 1946 and thus reached the age of 65 in 2011 may decide whether to claim benefits immediately -- at the "traditional" age of 65 -- or wait until age 66. If the person chooses to retire immediately, at age 65, his Social Security retirement benefits would carry a 6.7 percent penalty. The trade-off is therefore lower annual payments for as many years as the person remains alive against the additional 12 months' worth of pension from claiming early.
For example, if the full retirement benefit amount was $10,000 a year and the person lived until age 70, then claiming Social Security at age 65 would mean total payments of five years times $9,330, or $46,650, while waiting until age 66 would mean total payments of four years times $10,000, or $40,000.
However, if the person lived until age 90, claiming Social Security at age 65 would mean total payments of 25 years times $9,330, or $233,250, while waiting until age 66 would mean total payments of 24 years times $10,000, or $240,000 -- or nearly $7,000 in additional Social Security for the person who waits that extra year.