Thinking differently about Social Security

We all know that the longer you wait to start collecting Social Security the higher your benefit will be because for every month you delay collecting, you earn a higher benefit, right?


A better and more accurate way to look at it is that there is an early retirement penalty for each month before age 70 you start to collect. That’s the way a pension plan would work.

Typically the normal retirement age under a pension plan is 65, but under certain conditions like achieving a level of service, early retirement is available with or without a reduction in benefits, sometimes an actuarial reduction and sometimes subsidized by the plan.

So, for a person who has a full Social Security retirement age of 66, 100% of the accrued benefit is at age 70 and at age 66 the early retirement reduction is 32% of the full benefit.

Viewed this way, more people may be inclined to work longer to lower the early retirement penalty. Yeah, I know it’s just the way you look at it, but isn’t that important in many decisions we make.

One way you don’t want to look at collecting is with a goal of maximizing the lifetime benefit you receive.

What really matters is maximizing your monthly income, when you need it most.


  1. My father retired and took early SS at age 62… and it’s a good thing he did because he died at age 72.

    I also retired and took early SS at age 62. Between the SS COLA’s and what I earned adding some of that SS money to my investments, I’m happy.


  2. I started collecting Social Security at age 62 because the increased amount I would get at 66.33 years FRA was just not going to change my standard of living in future years. But the increase of $1,288 per month for 52 months before FRA would equal a 66% increase in my then monthly income. I will be 65 in Jan 2021 and it would of been hard to afford the Medicare premium without the SS benefit, so I was always going to start my benefit before FRA and I was never considering age 70. I now am saving money every month and have a $10,000 emergency fund. I think taking SS early has worked well for me, as both retirement income sources are indexed to inflation. Also, by taking a lower early SS benefit I am saving the System money in the out years, if I live passed age 79. I know many who have waited for the bigger SS check and have died before getting a single check. My Dad waited until age 65 and only collected 11 checks before he died in a car accident, saving SS over $25,000, even though his accountant said he should of start at age 62. Now there is Covid to make me think that many will not make it to 79.


  3. “ So, for a person who has a full Social Security retirement age of 66, 100% of the accrued benefit is at age 70 and at age 66 the early retirement reduction is 32% of the full benefit.”

    Just a comment on the math. Waiting until 70 does get you a 32% increase. But, the reduction from your age 70 benefit to age 66 is about a 24% reduction.


    1. Don’t understand. Every year before age 70 is a 8% reduction and from 66 to 70 you gain 8% a year or 32% Am I missing something?


      1. Yes you are.
        Age Amount
        66 $1,000
        70 $1,320
        Age 66 to 70 = 32% increase

        Under your assumption
        $1,320 @ age 70, a 32% reduction @ age 66
        would be $898
        = $1,320 * (1 – 32%) = $898

        But at age 66, the benefit is $1,000, not $898
        $1,000 / $1,320 = .7575
        1 – .7575 = .2424
        24.24% reduction of the age 70 benefit


      2. Not exactly the way it works. Bottom line is 8% per year from the starting point up or down. You can’t do both.


      3. RD – You are right, but math is funny. The $320 increase is a 32% increase above the $1,000 FRA benefit amount. But $1,000 is 75% of $1,320, so Bruce M is right on that fact only and nothing else. He should of used this to figure the difference 320 / 1000 = .32 X 100 = 32%.

        But with the time value of money it is not a simple math problem. In my case we gave up 27% of the FRA for myself and my wife who never worked. With her spousal benefit our total starting SS benefit at 62 equaled $1,288, $190 above my FRA benefit. She gave up $130 vs FRA and I gave up $220 vs FRA. I know my percentages are right as I have kept my SS statements received the year before starting our benefit. One thing that I found out was that SS figures spousal benefit reduction at age 62 from the primary FRA number, not from my reduced benefit amount at age 62. Also, military service years are given special credits to adjust average income, as some of the service members income is not taxed for SS. I still believe that the SS program is the best return for the average worker as they only pay half of the FICA tax and there is no way of knowing if an employer would increase your wages if they did not have to pay the FICA tax or that wages are actually reduced because of the FICA tax.


  4. Yes, view as a penalty for starting sooner. However, remember to adjust your calculations, as appropriate, for the time value of money – $1 today @ age 62 does not have the same value as a $1 eight years later @ age 70. Factor in post-retirement inflation (impact on payments), pre-retirement wage indexation (impact on initial and later benefits), whether you’ll spend everything or save some (investment returns), use multiple scenarios regarding your life expectancy, and that of a spouse if you are married.

    Remember, it is not what you get that counts, it’s what you and your spouse get to keep, after taxes.

    Use one or more of the different social security strategy calculators.

    This is one of the most complicated financial decisions you will ever make – if your goal is to optimize the net, after taxes. However, that is not what most retirees are focused on. It is income. So, if you want to maximize the monthly amount of guaranteed, inflation-indexed income (instead of say, buying an annuity), you’ll have to find a way to delay commencement until age 70 – whether by continuing employment, or gap-filling with other monies, or possibly, by taking a reduction in your standard of living, or a combination of those and other strategies.


    1. No, it’s not the same. It’s like losing 50% in the stock market. Once you lose that 50% you don’t need a 50% gain to break even, you need a 100% gain to break even.

      Do the math. It is not the same.

      This is the first time I’ve ever disagreed with you. I really enjoy all of your articles. And I enjoyed this article also.


      1. I suspect it depends on where you are measuring from. I agree with you that the “penalty” is the difference between $1,000/month at age 67 SSNRA, $700 @ age 62, and $1,260 @ age 70. So, if you measure it with age 62 in the denominator, it is an 80% penalty. If you measure it with $1,260 in the denominator, it is a 44+% penalty.

        Either way, it is a significant difference in nominal, monthly amounts. However, assuming a single individual who could commence $700 @ 62 or $1,260 @ 70, assuming the tax rates are the same, that the annual COLA is 3%, and that the money would earn 5%, early commencement has a greater value until the individual reaches age 95. If you assume 0% COLA and 0% investment earnings (that all money is spent and that there is no difference in a dollar @ 62 and a dollar @ 70), the “crossover” point is at age 79.

        Remember, world renowned economist/psychologist (2002 Nobel prize winner in behavioral economics/finance) Daniel Kahneman, identified loss aversion as an important concept associated with prospect theory and is encapsulated in the expression “losses loom larger than gains” (Kahneman & Tversky, 1979). It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. So, yes, if you want to highlight the potential, you would express this as a “loss”, a “penalty”. However, I think Professor Kahneman would typically look at both penalties vs. foregone additional benefits as losses.

        Regardless, you need to further adjust loss aversion with hyperbolic discounting – the time-inconsistent decision-making many of us have. We are “present-biased”. Economists measure value using a utility approach. So, if your assumed rate of return is 5%, $1 today should have about the same value as $1.05 a year from now. Yes, given a choice of $1 today and $1.05 a year from now, people will almost always take $1 now. How large does the difference have to be @ age 62? Many would say that the 80% penalty is not enough to convince individuals to select a commencement at age 70. One study I read suggests that for every dollar they could have today, you would need to provide $4 a year from now, or $6 after three years. Note the time/value inconsistency between one year and three years.

        The trick would be to get people to choose the commencement date, to set expectations, at age 32. That is, if someone were choosing $700 a month 30 years from now, or $1,260 38 years from now, they would be much more likely to choose commencement at age 70. So, offer some reward at age 32 to get people to make an election to commence Social Security at age 70. Need not be much, say a one time payment of 5% or 10% of wages – in the form of an income tax refund.

        But, frankly, Social Security recipients shouldn’t be penalized (nor rewarded) for commencing early or later. That is, an individual (or her survivors) should receive the same value, the same present value of payments – regardless of whether they commenced at age 62 or age 70 or any other age. That is, there should be an additional “award” for those who delay but die prematurely – which would take the form of a legacy payment to survivors . And, for those who commence early, it would be paid in the form of a step up in monthly benefits. All of these folks paid the required taxes – whatever they were charged – their commencement date shouldn’t affect the value of the benefit they actually received. Makes no difference the date of death of the worker.


      2. Bruce M – Reasons I started my benefit at age 62 is my wife and I will receive $66,976 before FRA, $355.488 to age 85, not counting COLAs. Also our starting benefit of $1,288 is $198 above my FRA amount. My wife never worked outside the home, her spousal benefit was a bonus in my opinion. The $350 per month loss that we gave up by taking our benefit at 62 will not be a big factor if at all, if we live into our 80s as life insurance will be a much bigger benefit tax free, if I die before my wife. Total family benefit has been reduced by $17,976 to age 85 not counting COLAs. About 6% of total benefit over 23 years. Each person must decide for themselves and their family when is the right time to start SS benefits. In this case one size does not fit all.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s