How much does my social security benefit increase when I delay filing?
How much does my social security benefit increase when I delay filing?

How much does my social security benefit increase when I delay filing?

A recent email reads (in part) as follows:

I am approaching 62 years old when I can apply for my social security. I have heard that if I submit an application at the age of 62, my benefit will be penalized the most and that if I wait to report, my benefit will increase by 8% for each year I wait.

Is this correct?

Dear reader,

You are partly right, and you are on the right track with the rest of your statement, just a little on the exact amounts.

It is true that if you apply for your social security benefit at the age of 62, your benefit will be reduced to the minimum amount. It is also true that for every year you delay, your benefit will increase, but it is not always by 8% per year.

Read more about Social Security on MarketWatch

To better understand the increases from year to year, we need to review the rules on reductions in early administration. For the 36 months closest to your full retirement age (67 for people born in 1960 or later, slightly less for those born earlier), the reduction is 5/9 of 1% for each month. So if you file exactly 36 months (3 years) before your full retirement age (OFF), the reduction to your benefit will be 20%. We get this result by multiplying 5/9% by 36 (180/9 = 20).

For all months greater than 36 before your FRA, the reduction is calculated as 5/12 of 1% per. month. In practice, this results in a 5% reduction in benefits for each 12-month period that is longer than three years before your FRA.

The maximum reduction in benefits occurs when you apply for social security benefits at the age of 62, your earliest eligibility age. If your FRA is 67, age 62 is 60 months (five years) before your FRA. So we know that there will be a reduction of 20% (since it is more than 36 months) plus the additional months that are greater than 36. 60 months minus 36 months equals 24 months. The reduction for these additional 24 months is 10%, as 24 times 5/12% equals 10% (120/12 = 10).

Read: A majority of workers trust social security – should you?

Then later, after FRA, there is another form of increase, called a delayed retirement credit. This credit is 2/3% per. month, a total of 8% for each year with delay. (This is where the 8% increase for each year of delay comes from, but it does not work exactly as you would think. Read on.) To learn more about Delayed pension creditsclick on this link.

To understand how much your benefit will increase for each year of delay (starting at age 62), we need to calculate the benefit amounts at each age level and compare. I have put these in the following table together with the percentage increase from year to year:

Age

Benefit amount

Year-on-year increase

62

$ 700

63

$ 750

7.14%

64

$ 800

6.67%

65

$ 866.67

8.33%

66

$ 933.33

7.69%

67

$ 1,000

7.14%

68

$ 1,080

8%

69

$ 1,160

7.41%

70

$ 1,240

6.9%

This table is based on a person who has an FRA of 67, and that person’s benefit available at age 67 (also known as the primary insurance amount or PIA) is $ 1,000. You can see this by looking at the 67 year old line showing $ 1,000 benefits.

Annual COLAs (Cost of Living Adjustments) have not been included in this table as it would complicate matters and make it incomprehensible.

As shown in the table, the actual year-on-year increase varies from as little as 6.67% up to 8.33% – this is not always an 8% increase from year to year. In fact, although 8% is quoted quite often (because that is the amount used to calculate the DRC), there is only one year-on-year period where the increase is exactly 8% and that is the first year after din FRA. This is because the DRC increases are not compounding, but rather accumulating. The 8% delay credit for each year is simply added to the previous year’s 8%, so the two year delay is 16%; three years is 24%, and so on.

Due to this accumulating nature of the increase, the rate of increase from year to year is less than 8% for each subsequent year.

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