If you’ve been reading up on Social Security, you may be aware that the program is facing a major financial challenge. In the coming years, Social Security’s main revenue stream, which is payroll taxes, is expected to shrink. This means Social Security won’t have enough money to keep up with scheduled benefits once its trust fund runs out of money.
If Congress doesn’t find a way to shore up Social Security’s finances, recipients could face a 22% benefit cut as early as late 2032. A cut that size could be catastrophic for the millions of older Americans today who rely on Social Security for income. It could also negatively affect future retirees’ finances.
One option lawmakers have to prevent Social Security cuts is to raise the program’s full retirement age, or FRA. But it’s important to recognize that raising FRA may be akin to a backdoor benefit cut, even if it’s not a direct one.
Quick Read
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Social Security faces a potential 22% benefit cut by 2032 if Congress fails to act on its funding shortfall.
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Raising the full retirement age to 69 would cut monthly benefits by roughly 13% for workers who claim at 67.
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Critics argue the FRA increase unfairly penalizes physical laborers who cannot realistically work until age 69.
How raising FRA might work
Social Security’s current FRA is 67 for anyone born in 1960 or later. At that age, claimants can collect their monthly benefits without a reduction.
To pump more money into Social Security, some lawmakers want to raise FRA to age 69. Doing so does a couple of good things for Social Security.
First, it might push more older Americans to hold off on claiming benefits. Secondly, it should keep workers in the labor force for longer. That could, in turn, increase payroll tax revenue for Social Security, allowing the program to better keep up with scheduled benefits.
Raising Social Security’s FRA would not affect the earliest age at which workers can claim benefits, which is currently 62. But claiming benefits ahead of FRA results in a reduction of about 6.67% in Social Security per year for the first three years of filing early.
Now, let’s say FRA is raised to 69, and that the 6.67% yearly penalty for filing early is applied. That means a 55-year-old today who decides to claim Social Security at 67 instead of 69 could lose roughly 13% of their benefits compared to what they’d receive at 67 under the current rules.
To illustrate the impact with numbers, let’s say Bob is 55 with an FRA of 67 and the current rules don’t change. If he’s entitled to $2,000 at FRA and he files at 67, he should get $2,000. If FRA is moved to 69 but Bob files at 67 anyway, his check would be reduced to about $1,733 for life.
Will lawmakers change FRA?
Proponents of changing Social Security’s FRA say it makes sense given that Americans are living longer. Also, raising FRA helps lawmakers avoid implementing widespread tax hikes.
The problem, though, is that raising FRA effectively forces people who can’t work past age 67 to take a cut on their Social Security checks. People in physical jobs, for example, may not be able to keep working until age 69 the same way people with desk jobs can.
For this reason, there’s been pushback on this proposal, even though Social Security definitely needs some form of financial lifeline to prevent cuts in the coming years.
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