Social Security Math Changes in 2017

Beyond the 0.3% cost of living adjustment and an increase in the payroll tax earnings cap, there is one other major change for Social Security that began on Jan. 1. Though it hasn't been widely advertised, starting this year the full retirement age for brand-new retirees increases.

In each of the past 12 years, the full retirement age has held steady at 66 years. Anyone born between 1943 and 1954 could retire at age 66 and collect 100% of the benefits they were due based on their earnings history. They also had the option of claiming as early as age 62 and receiving 75% of what their full retirement age benefit would be, or waiting all the way until age 70 (the point at which benefits stop accruing) and netting a 32% raise on top of their full retirement age benefit.

Beginning in 2017, brand-new retirees who can enroll for Social Security benefits, but were born in 1955, won't reach their full retirement age until age 66 years and 2 months. Starting this year and in each successive year thereafter through 2022, the full retirement age will increase by two months to account for lengthening life expectancies, as outlined by the Social Security Amendments of 1983. This will culminate in a full retirement age of 67 years for those born in 1960 or after.

Increasing the retirement age is designed to encourage healthier older Americans to work longer, as well as save more of their hard-earned money. Working longer has a doubly positive effect in that it generates more payroll tax revenue for the program and reduces the length of time seniors are drawing payments from the Trust.

So why is this important, and what does it have to do with Social Security math? Well, raising the retirement age also has an adverse impact on payouts. Future retirees either have to wait longer to receive their full retirement age benefits, or they have to be willing to accept a bigger reduction in their benefit from enrolling before reaching their full retirement age.

For anyone born between 1943 and 1954, the least they can receive is 75% of their full retirement age benefits if they claim as early as possible. For seniors born in 1955 who plan to claim Social Security as soon as possible, they'll only be netting 74.2% of their full retirement age benefit. Similarly, waiting until age 70 to file for benefits no longer nets a person born in 1955 a 32% raise over their full retirement age benefit; instead, the benefit of waiting as long as possible is a 30.7% raise.

By the time the full retirement age hits 67 years for those born in 1960 or later, claiming as early as possible would result in a payout of just 70% of your full retirement benefit, and waiting until age 70 would boost your top-end payout by 24%.

A rising full retirement age could be yet another wake-up call for America's workers to have other channels of income at the ready when they retire. Social Security is only designed to replace about 40% of the working wages of the average retiree, so with the full retirement age rising, and the program facing a budgetary shortfall by 2034 (as predicted by the Social Security Board of Trustees), it's time for America's workforce to get serious about reducing its expected reliance on Social Security income during retirement.