Social Security: Why early retirement means smaller cash boosts from COLAs

Every year in October the Social Security Administration announces the annual cost-of-living-adjustment, better known as COLA. This is designed to help keep beneficiaries’ monthly payments in step with inflation.

The determined increase is automatically applied to benefits at the start of the following year. However, while everyone receives the same percentage, the size of the boost is not equal for every beneficiary due to the varying amounts each one receives.

Those who are most adversely affected are the people who have the smallest checks. But it is something that you can have some control over. Social Security benefit amounts are determined not only by your earnings history, but also by when you retire.

Currently, full retirement age in the United States is age 67 for those born on or after 1960. However, if you wait to claim benefits until you turn 70, you can get a 24% boost to your monthly payments. Inversely, if you start to claim benefits before you reach full retirement, you will see the maximum amount that you can receive based on your earnings record reduced on a sliding scale.

So, the math is simple, a lower starting amount means the COLA increase will be smaller. While you may benefit from claiming Social Security early, it could cost you lost benefits in the future.

Early retirement could knock 30% off your monthly payments

The earliest a person can retire is age 62 plus one month, as you have to be 62 throughout the first month of retirement. However, workers are penalized for not waiting until they reach full retirement age and are rewarded for claiming benefits even later than that threshold.

As mentioned above, in order to receive the maximum monthly retirement benefit amount from the Social Security Administration, a worker needs to wait until they are 70 to begin receiving benefits.

In 1983, legislation was passed to strengthen the financing of the Social Security program and guarantee the solvency of the trust funds that were facing an imminent cash crunch. As part of the changes, a gradual increase in the full retirement age was implemented going from 65 to 67. Those who were born in 1960, and after, won’t reach full retirement age until they are 67 for a full month.

How to calculate the Social Security early retirement penalty

The Social Security Administration has a calculation for just how much your monthly Social Security payments will be permanently reduced from the primary insurance amount accumulated over the years you contributed depending on just how early you retire.

During the first 36 months, for every month that a beneficiary signs up to receive Social Security prior to full retirement age the primary insurance amount will be reduced by 5/9 of 1 percent, or around 0.55 percent. For each additional month beyond 36 months, the reduction is 5/12 of one percent, or a little less than 0.42 percent.

A person who was born in 1960 or later and that retires at 62 in the first month they eligible to begin receiving Social Security benefits will be 60 months short of full retirement age. That translates to a 30 percent permanent reduction to compensate for the extended number of months it is expected they’ll be collecting monthly payments.

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