Social Security's Full Retirement Age Is 67 - But a Change Could Push It Even Higher

There are many seniors who end up living on just Social Security when they retire. And people in that situation often cannot afford to reduce their benefits by filing early.

The earliest age to sign up for Social Security benefits is 62. But for anyone born in 1960 or later, Social Security's full retirement age (FRA) is 67. FRA is when you can claim your benefits without a reduction. If you file at 62 with an FRA of 67, your monthly checks will shrink by about 30% for life.

But while FRA hasn't changed for today's workers so far, there's a chance it could change in the future due to financial challenges Social Security is facing.

Social Security is at risk of benefit cuts

Social Security is primarily funded by payroll taxes. Workers pay into the program at a rate of 6.2%, and the companies that employ them also pay 6.2%, up to a certain wage limit that changes from year to year.

The problem is that in the coming years, Social Security expects its payroll tax revenue to shrink as baby boomers retire in droves. There will, of course, be workers coming in to replace those who are retiring. But the replacement rate is not expected to be strong enough to make up for all of the workers who are going to stop contributing to the program.

As a result, the Social Security Trustees predict that benefits could be headed for a 22% cut as early as late 2032. While that timeline could wiggle, lawmakers will need to intervene if they want to avoid Social Security cuts.

Raising Social Security's FRA is an option lawmakers are looking at

In order to prevent broad benefit cuts, some lawmakers suggest raising Social Security's current FRA. The Congressional Budget Office says FRA could increase from 67 by two months for every birth year for workers born between 1964 and 1981. As a result of that increase, FRA would be 70 for anyone born in 1981 or later.

Raising FRA is good for Social Security for two reasons. First, it could keep workers in the labor force longer, thereby allowing Social Security to receive more payroll tax revenue. Secondly, it allows Social Security to wait longer before paying some benefits in full, which could help with the program's cash flow.

Raising FRA hurts some workers more so than others

While raising Social Security's FRA might seem like a reasonable solution to the current financial crisis the program is facing, the problem is that it may inevitably sentence some workers to a permanent benefit cut they can't afford. This especially holds true for people in physical jobs.

It's one thing for an office worker to stay in the labor force a couple of years longer to collect their Social Security checks in full. But people who do physical work may not be able to keep it up beyond age 67. Workers in that situation could therefore end up at an unfair disadvantage if this change is implemented.

There are other solutions to prevent Social Security cuts

Raising FRA is not the only potential solution to stave off Social Security cuts. Lawmakers can also make changes to how taxes are collected to fund Social Security.

First, they could raise the general tax rate so that instead of workers and employers paying 12.4% combined, they pay a higher percentage. Another option is to raise or eliminate the wage cap that limits the amount of earnings that are subject to Social Security taxes each year.

An increase in taxes would obviously burden working Americans in the near term. It's difficult to determine which would be worse – forcing workers to wait longer to collect their Social Security benefits in full, or having to pay more taxes every year out of their wages. Lawmakers will have to weigh these and other options soon, since the clock toward Social Security's insolvency date is ticking.

Bottom line

Social Security is one of the most important benefits for seniors today. And because so many people struggle to save for retirement, many cannot afford to reduce their monthly benefits by filing early.

If FRA ends up getting raised, those who can't continue to work until their new FRA risk reduced benefits for life. That could be a problem not just in terms of a lower base payment, but also smaller cost-of-living adjustments (COLAs). That's because the smaller your check is in the first place, the less valuable all COLAs become.

It's not a given that lawmakers will vote to raise FRA for Social Security. There are other solutions to prevent benefit cuts that can be implemented. But it's important to save for retirement in case FRA does move in an unfavorable direction, and you're not able to stay in the workforce long enough to collect your monthly benefit in full. Having savings could ease the blow of a reduced check and help you avoid financial struggles throughout your retirement.

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