Can the Actuarial Reduction for Social Security Early Retirement Still Be Right?
Monthly Social Security benefits claimed at age 62, rather than 65, are reduced about 20 percent to avoid additional costs to the program. When the reduction was set over 50 years ago, a worker claiming at 62 received benefits about 20 percent longer. As life expectancy has risen, this worker now receives benefits only about 15 percent longer. But the cost of benefits, the present discounted value of lifetime benefits, also depends on interest rates. Rates have generally risen since the 1960s, making future benefits less costly. These higher rates have largely offset the impact of rising life expectancy, suggesting that the reduction factor has proven remarkably durable over time.
The option to claim Social Security benefits earlier than the program’s Full Retirement Age, in exchange for receiving an actuarially reduced benefit, is a key feature of the nation’s Social Security program. This principle remained in place when Congress increased the Full Retirement Age from 65 to 67.1 Most workers choose to claim early and retire on the reduced benefits.
The option to claim early was enacted over 50 years ago, when Congress set 62 as the program’s Earliest Age of Eligibility. To make up for the extra three years of benefit payments, those claiming at 62 received 20 percent less in monthly benefits than if they had claimed at 65. Despite a significant increase in life expectancy in the intervening years, benefits claimed at 62 today are still about 20 percent less than benefits claimed at 65. This brief asks whether this actuarial reduction is still correct.
The discussion proceeds in three steps. The first section describes the creation of the option to retire early on actuarially reduced benefits. The second section explores the implications of changing life expectancy and interest rates on the actuarial equivalence of the benefits. The third section concludes that while benefits claimed at 62 are now less than actuarially equivalent to benefits claimed at 65, the difference is small. Thus, the reduction factor has proven remarkably durable.