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A reader and fellow advisor looks for clarification on a client's Social Security benefits statement.
On all of my clients' "Your Social Security Statement" (which are available from SSA.gov), the bar chart on the first page showing the increase in monthly benefits by age is only roughly consistent with the familiar -5%, -6 2/3%, +8% yearly changes in benefits. I have attached an example. (Note that this client has been retired for over a year, so $0/year of income is assumed until she claims her benefit. That's not complicating the chart.) Two things seem especially confusing. The age-67-to-68 increase is only $13/month. The age-69-to-70 increase is a significant $307/month. Also, note that all the changes in length from bar to bar are the same, regardless of the values shown. (The bar-change lengths are probably more accurate than the numbers mentioned above for age-67-to-68 and age-69-to-70 increases.) I assume this relates to the client's birthdate being in December, a factor interacting with whatever the chart maker means by "Age Retirement Benefits Start."
Your questions refer to Social Security statements of estimated benefits. In the past, those statements were mailed out yearly on one's birthday, but for cost reasons, they now are only sent once you reach age 60. You can find a PDF version of your Social Security benefits statement on the SSA.gov website by locating your "MySSA." These statements were changed in recent years to be more informational and now include a bar chart on its side marked with ages 62 to 70. If you're older than 62, it starts at your current age and runs to 70. It also shows an estimate for your monthly benefit if you were to claim at age 62, 63, 64, and so on.
You were kind enough to send us a snip of an image of the front page of an unidentifiable client's Social Security statement. You're saying that the estimates on that bar chart only seem roughly consistent with the actual reduction if you claim your benefits before your Full Retirement Age (FRA) and with the delayed retirement credits if you delay claiming until after your FRA.
I want to start by describing the anomalies you're observing. Here's the scenario: your client was born in December 1963. She is below age 62, which she will reach in December 2025. She is retired, so her earnings record shows $0 for the past two years. Had there been income in the past two years, Social Security would assume she would continue earning that amount until she claims, which would complicate the situation. It could skew how the numbers work, but that's not happening in this case.
Let's start with the statement's dollar benefit estimates for this person claiming on their 62nd, 63rd, and future birthdays up to age 70. That will help visualize the situation – and the anomalies.
62: $1,409
63: $1,500
64: $1,600
65: $1,734
66: $1,867
67: $2,014 at their FRA and considered their Primary Insurance Amount (PIA)
68: $2,014
69: $2,174
70: $2,481
Let's look at the anomalies.
First anomaly: when claiming early
When you claim your benefit early, before your FRA, Social Security reduces your benefit for up to three years by 20% over those 36 months. Reductions are prorated where, for each month that you claim early before your FRA and for up to 36 months, they'll reduce your benefit by 5/9%. That equals 6-2/3% per year, or 20% over three years. Then, for each additional year you claim early, they will reduce your benefit by 5/12% each month.
Let's look at a typical example. Say someone has an FRA of age 67 and claims at age 62, which is 60 months early. They will experience a 30% reduction in their benefit: a 20% reduction in the first three years of claiming early and another 5% per year beyond that. In this case, 30%.
However, if you look at the math in your client's case, you'll notice that their age 62 benefit of $1,409 is a bit higher than 70% of their $2,001 PIA at their age 67 FRA. To understand this, we'll have to go into the weeds somewhat.
Remember that the first month you are eligible to claim your benefit – known as your "month of entitlement" – is not when you turn 62. Instead, it's the first month that you're 62 for the entire month. So, in this case, the person is not entitled to claim in December upon turning 62 but in January. Because of this, they are not first claiming their benefit 60 months before FRA, but rather 59 months. That explains why they receive $1,409 at 62 instead of $1,400 or $1,401, which is about an $8 difference.
When people claim as early as possible, very few actually experience the full 30% reduction from their PIA benefit at FRA. Most experience a 29.6% reduction.
Here's the exception: I'm part of the small group of people who can actually claim a full 60 months before FRA because I was born on April 1. If you turn 62 on the first day of a month, Social Security considers that you turned 62 the month before, so you are deemed 62 for your entire birth month. Should you decide to claim at 62, you get to claim a benefit the full 60 months before FRA.
Correcting the anomaly found on the Social Security benefits statement bar chart would not be difficult. For those of us born on the first day of a month, the first bar could say "62," as it does. But for everyone else, it should say "62 and one month" because they're not really claiming benefits in the birth month they turn 62. They're claiming the following month at "62 and one month" – when they are 62 for the entire month.
If we're doing the math, that initial age 62 benefit should be around $1,400 instead of $1,409. Now you know why there's a difference.
After that, the values progress correctly. The age 63 benefit is 25% less than the FRA benefit, and the age 64 benefit is 20% less. Beyond that, the benefit is prorated according to the formula.
But next, you point out the second anomaly.
Second anomaly: delayed retirement credits
Whenever you delay claiming beyond your FRA, Social Security rewards you with an increase in your benefit of 8% for each year that you delay. They award it monthly, prorated, giving you 2/3% for each month you delay – or 8% for 12 months.
However, in the benefits statement, from age 67 to 68, the benefit only went from $2,001 to $2,014, or $13. That is not an 8% increase. Then, while the 68-to-69 increase was normal, the benefit jumped by $306 between ages 69 and 70 – from $2,174 to $2,481.
These differences can be explained by how Social Security actually awards your delayed retirement credits. And, in this particular case, it has everything to do with the month this person was born: December.
Let's look at how this works. Despite all the technological advances experienced until today, Social Security only calculates the delayed retirement credits you have earned once a year: in January. They will review the prior year and credit you with all the delayed retirement credits you earned in the past year. Those are the delayed retirement credits you get for the coming year until January next year. If you earn more, they'll grant them, but if you've claimed your benefit, they won't.
Let's continue with your extreme example of someone born in December. When the person turns 67 in December, they could get $2,001. But let's say they wait until age 68 – a full year later. By formula, they should get 8% more, but they don't because January is the very next month after December. So, they turn 67 in December. The following month, Social Security looks back and says, "Well, you didn't claim, so we will give you the delayed retirement credits you've earned the past year. You only delayed one month: from December of the year you turned 67 to January. That's one month at 2/3%. Well, 2/3% of $2,001 is $13. That's where the $2,014 comes from.
This fact annoys people, and it should. No matter when you claim during that year, you will only get one month of delayed retirement credits. If you claimed in January, that's precisely what you were owed – no big deal. But if you claimed in February, March, April or May, all the way to December (which is what they're estimating here), you still only get one month of delayed retirement credits.
In January of the year following when you turn 68, Social Security will look back and give you the rest. That means you'll miss out on your delayed retirement credits for those 11 months – for just one month – and then they'll reward you with the credits. What they don't do, though, is retroactively fix it. They don't go back and say, "Oh, although we only granted you that, we're not going to go back and fix the benefit from last year, even though you really should have been given more delayed retirement benefits. We're only fixing it from this January forward."
That's why the estimate on the statement looks so strange, from 67 to 68 – it only goes up by 2/3%, one month's worth of delayed retirement credits. Then, from 68 to 69, we see that it increases normally. But from 69 to 70, it goes from $2,174 to $2,481, far more than 8%. It's more like 14-15%. Why? Because if you claim at age 70, they will award you all the accumulated delayed retirement benefits immediately to the day and month you claim.
Social Security is capable of granting you delayed retirement credits in real time through the month you claim. They should be able to calculate your benefit precisely at "68 years and 4 months," for example. As proof, at 70, you get all caught up instantly per these estimates.
In short, the numbers in the statements don't match how people understand Social Security to work because of the nuances of how they apply reductions at age 62 and delayed retirement credits after FRA. Social Security doesn't try to explain any of this in the benefits statement. My explanation to our knowledgeable readers was already pretty confusing. Imagine writing that out for people who know nothing about Social Security.
Looking at the numbers and the percentage changes between those numbers, it doesn't seem to make sense. But now you know why. And it does make sense: unfortunately, it's how it actually works.
One more thing: when they reevaluate your delayed retirement credits each January, they don't actually do that in real time, either. You won't get the credits as of January. So you miss out on 11 months' worth of them. As soon as that December clock rolls into January, your benefit will eventually get fixed from that point forward to give you the full delayed retirement credits you are entitled to.
However, those calculating programs are only run a couple of times a year, as if Social Security lacks the computer power to run them regularly. Social Security is opaque when you try to understand its inner workings, but the frequency seems random, not just a schedule we haven't discovered yet. So you might go many months into the following year without noticing the fix that grants you those extra delayed retirement credits.
But the good news is that they will make you whole as of January. You'll get one of those adjustment notices: "Oh, by the way, we bring you up to date with your delayed retirement credits. Here's the extra $500 (or whatever), all the dollars we've missed since January." Be aware, though: don't expect it to occur in real time where you start seeing the benefits in January of the following year if you had additional delayed retirement credits earnings in the previous year.
Now that we have taken this little journey into the weeds, hopefully, you can grasp what is going on with your client's statement. The numbers are correct. The nuances are just not explained well enough for most people to understand why they don't seem to flow like most people understand Social Security to work. This is information you can tuck into your 'briefcase of knowledge' and have handy when questions come up about clients' Social Security statements.
One last detail
In your case, future earnings assumptions did not skew the situation, but they could have. Suppose someone still has some holes in their earnings record and has additional earnings moving forward before claiming the retirement benefit. In that case, that fact can skew statement numbers somewhat – beyond the issues we addressed in this case. The percentages will also be off a little bit. By the time people are approaching Social Security claiming age, they typically have nice, full earnings records and additional earnings aren't moving the numbers much. While that wasn't the case here, such future earnings can add another variable.