Hit 62 in 2020? Social security will pay you less.

Social Security is a major part of the income that most retirees receive, and a key component of financial planning for those approaching retirement is to ensure that they receive as much in social security benefits as possible. Nevertheless, there has been much talk of financial difficulties that the Social Security program has been going through lately, and some have discussed cutting to ensure that retirees and others can continue to receive benefits indefinitely.

One thing that comes as a big surprise to many is that we are still working our way through the solutions that lawmakers agreed upon when Social Security went through the recent financial crisis. Although it happened in the early 1[ads1]980s, beneficiaries still feel the consequences today – and that has led to some small reductions in benefits for those who have reached early retirement in recent years.

A Brief History of Social Security's Recent Set of Economic Challenges

Most people understand the basics of why Social Security faces difficulties. There are now more retirees than ever, and fewer employees support each of those retirees through social security payroll tax. There is pressure on the program's finances.

Image Source: Getty Images.

However, this is not the first time Social Security has met that challenge. More than 35 years ago, lawmakers realized that the payment system to fund the program was doomed to failure. Instead, lawmakers introduced a set of major changes to the program, including higher payroll tax rates, savings in Social Security benefits and a gradual increase in full retirement age from 65 to 67.

These solutions are & # 39; everything so different from what lawmakers today seem to impose. However, at the time of these early 1980s, no one wanted to punish those who were in or near retirement. Therefore, they agreed that the full retirement age would remain at 65 for more than a decade. From those who turned 62 in 2000, the retirement age would increase from 65 to 66 and go higher for three months each year. Thereafter, a 12-year break would keep the full retirement age of 66, until another phase of two-month annual increases came into effect for those who turned 62 in 2017.

For those who turn 62 in 2020, the full retirement age will be 66 2/3. That's up from 66 1/2 for those who turned 62 in 2019.

The cost of a two-month increase

Two months may not sound like much, and for some individual benefit, it won't do one huge difference. But it will be noticed.

For workers who claim right at age 62, for example, the effect of the increase will be that they are forced to claim 56 months instead of 54. According to the formula that regulates reductions to claim early, this will result in a further reduction of five-sixths of a percentage point. Now early claimants will get 71 2/3% instead of 72 1/2% of full pension benefit.

This makes a difference of $ 12.50 per month for someone who would be entitled to a monthly benefit of $ 1500 at full retirement age based on their work history. Again, that's not a huge amount, but losing $ 150 a year can be a big deal.

It is no longer worthwhile to wait

Waiting until retirement age does not really solve the problem. When the full retirement age was 66 1/2, workers who retired at 66 2/3 would have received delayed pension credit which would have given 1/3% to the monthly benefit. It had been an extra $ 20 a month – but 2020 & # 39; s 62-year-olds won't get it because of the rising retirement age.

This will not be the last time new pensioners face these reductions in benefits. Two additional cohorts of changes are planned after 2020, and will take effect for 62-year-olds in 2021 and 2022. If you are in these age groups, it is important to understand that the benefits you have planned to receive will reflect reductions. which has been in the works since the 1980s. If you don't take them into account, you might wonder why you didn't get as much from Social Security as you first expected.