28 Feb Why am I penalized for taking Social Security at 62?

Q. Why does the government penalize me for early retirement at 62 years old? The government did not contribute to my Social Security. Only me and my employer paid into the system, not the government. Isn’t this a form of discrimination?
— Upset

A. Having a lower Social Security payment isn’t actually a penalty.

More on that in a moment.

First, Social Security benefits are based on an individual’s lifetime earnings.

It uses the average indexed monthly earnings for the top 35 years of your work life, said Jody D’Agostini, a certified financial planner with Equitable Advisors/The Falcon Financial Group in Morristown.

She said Social Security was designed to replace a portion of your wages.

“Your payments are not actually held in an account for you but are used to pay benefits to those that have already retired,” she said. “It was never designed to be the only source of retirement income.”

Instead of thinking of it as a penalty, think of it as an incentive to work longer and therefore add to your benefit, D’Agostini said.

“It will increase by 7 to 8% a year up until your maximum benefit at age 70,” she said. “You are entitled to your full benefit at your Full Retirement Age or FRA.”

Social Security is often the best source of guaranteed income, and therefore starting at a higher amount will better support you for life, she said, noting that longevity is one of the biggest risk factors in retirement.

“Working longer coupled with delaying and accruing a higher benefit might make sense,” she said. “Claiming early provides a permanently reduced benefit and the cost of living adjustments will accrue from this smaller benefit as well.”

D’Agostini said the Social Security Trust Fund will only be able to pay 75% of benefits by 2034 unless changes are made.

“This is largely due to Baby Boomers retiring in large numbers each day with fewer workers there to pay the bill,” she said. “Also, people are living longer and so the benefits are paid out for a much longer period.”

Stay tuned for changes in the future.

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This story was originally published on Feb. 28, 2022.

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