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Social Security Early-Claiming Penalties: Are They Fair?

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As the Social Security system stands, full retirement age (FRA) falls somewhere between 66 and 67 for most individuals (eventually, FRA will reach 67 for all taxpayers). Taxpayers who claim Social Security once they’ve reached age 62, but before reaching full retirement age, are penalized depending upon how early they claim benefits.

Under the formula, benefits are reduced by 6.7% for every 12 months before FRA that they are claimed. Payments are increased by 8% per 12 months for people who wait until after full retirement age to claim benefits.

For individuals with higher life expectancies, waiting to claim benefits can lead to an overall increase in lifetime benefits paid. There have been calls, however, to reform this system in order to reduce the reduction in benefits for claiming early, especially in the wake of the COVID-19 pandemic.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about changing the way reduced benefits for claiming Social Security early are calculated. 

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: The penalty for claiming Social Security benefits early is antiquated and should be revisited, especially in the wake of the pandemic. Many people have been forced into early retirement because of the pandemic — making it much more likely that these taxpayers will claim Social Security early and be permanently punished by the reduction in benefits for claiming early. Additionally, the full retirement age was recently increased to 67 for most taxpayers, making the penalties even more pronounced for anyone who claims benefits at 62 and who will now be penalized for five years’ worth of “early” benefits.

Byrnes: There are far better ways to reduce inequities and provide assistance to taxpayers forced into early retirement because of the pandemic. With longer life expectancies in modern times, it makes sense that we should encourage taxpayers to work longer if they’re able — and the Social Security penalty for claiming early accomplishes just that. 

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Bloink: We’re talking about a system that was developed back in the 1950s — and one that’s barely been touched along the way. Unfortunately, the detrimental impact of our current Social Security system on the lowest-earning taxpayers is the most pronounced — exactly those individuals who rely on Social Security benefits the most during retirement and exactly those groups that are most likely to have been forced out of work during the pandemic.

Byrnes: In reality, modernizing the benefit structure itself would be much more useful. For example, we could provide a credit for caregivers who spend time outside of the workforce and are thus penalized with a lower benefit based on reduced earnings over their working lives. Paying for an across-the-board increase in benefits for early claimers would be far more difficult.

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Bloink: Taking more dramatic steps to modernize the Social Security system as a whole would be beneficial, yes — but probably also unworkable given our current economic and political realities, as well as the instabilities we’re facing in the workplace. Most people file for Social Security benefits below their FRA. Taking the simple step of reducing the penalty would help those individuals now, while we focus on the best way to modernize the system going forward.

Byrnes: We have to maintain a system where workers have an incentive to keep working to a reasonable retirement age. We have programs to help those who have been displaced from the workplace because of disability. Those who can reasonably keep working until full retirement age should be encouraged to do so, and encouraged to participate in private savings options as well. Simply offering a full benefit at an earlier age across the board isn’t the way to fix the system.

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