In calculating your benefit, the Social Security Administration figures your monthly earnings over your working years, indexed to average wages. That number is plugged into a benefits formula to arrive at your Primary Insurance Amount, or PIA for short. Social Security’s next step is to look at your birthday and make an actuarial adjustment for your age. The size of the adjustment depends on where Congress sets the statutory Retirement Age.
If Congress sets the Retirement Age at 67, which is currently the case for those born after 1959, the adjustment will result in less of a reduction than someone will experience if it is set at 69. Likewise, a statutory age of 67, will give retirees more of an increase than they would receive if the age were set at 69.
In other words, it’s the actuarial alchemy that results in the cut as you increase the Retirement Age. Here’s what it means in terms of the numbers: If workers retired at 62 when the retirement age was 65, they would have had their PIA reduced by 20 percent. With 67 as the statutory definition of Retirement Age, those claiming benefits at 62 will find their PIA reduced by 30 percent. If the retirement age were ultimately raised to 69, Altman says the PIA for those claiming benefits at 62 would be reduced by 39 percent.
Similarly, if workers claimed benefits at age 70 when the Retirement Age was defined at 65, their PIA would have been increased by 40 percent. With the Retirement Age defined at 67, workers claiming benefits at age 70 will find their PIA increased by only 24 percent. And with a Retirement Age of 69, workers waiting that long to claim benefits would get an increase in their PIA of only eight percent.
“Without understanding the intricacies of how benefits are calculated, it’s not surprising that people don’t see that raising Social Security’s Retirement Age is an across-the-board benefit cut,” Altman says. “But is is.”
We hope our chart here helps. This is complicated stuff, and perhaps not a lot of fun to write about. But if we are serious about helping the public understand the choices between possible changes to Social Security as part of a grand bargain on deficit reduction, we have to hunker down and get it right.