Taking Social Security at 62 Brings Challenges and Benefits

Obamacare May Help Some Early Retirees

On Social Security, Early Retirement Can be a Real Battle. Al Bello/Getty Images

Despite getting substantially lower monthly payments, people who start claiming Social Security retirement benefits at age 62 often have good reasons for doing so, and may even be helped by provisions of the Affordable Care Act – Obamacare, according to the Government Accountability Office (GAO).

The Cost of Early Retirement

Deciding when to start claiming Social Security benefits is one of the most important financial decisions older Americans have to make.

While “full” or “unreduced” Social Security retirement ages currently range from 65 to 67, anyone with a qualifying work record can start drawing reduced benefits at age 62.

Make no mistake, people who start getting retirement benefits at age 62 pay a significant price for doing so. The monthly Social Security checks of those who retire at 62 will forever be about 25% lower than if they had waited until their full retirement age.

Also See: Social Security Trust Fund Gone by 2042

This decision becomes even more critical when you consider that the highest allowable Social Security benefit replaces only about 40% of the average worker’s preretirement income. 

For example, in 2014, the maximum monthly Social Security retirement benefit received by persons retiring at age 66 was $2,642, no matter how many years they had worked or how much they had paid in Social Security taxes during their working years.

Why Some People Choose to Retire at 62 Anyway

According to the GAO analysis, people who worked in physically-demanding blue collar jobs were 55% more likely to begin claiming Social Security before reaching their full retirement age.

People with longer work histories or who had voluntarily or otherwise – as in “layoffs” – left the workforce by age 60-62, were also significantly more likely to claim benefits early.

While it may be related to an increased likelihood of having blue collar jobs, more people without college degrees also tend to claim early, compared to college graduates.

And, of course, people who did not expect to live very long after reaching their full retirement age, or doubted that Social Security would be around for the rest of their lifetimes, were more likely to start drawing benefits at age 62.

How Obamacare Might Help Early Retirees

While people who choose to start drawing Social Security at 62 will inevitably suffer reduced monthly benefits, they may be helped out by the Affordable Care Act – Obamacare.

Due to many of the same reasons that drove them to claim benefits early, some early claimers never had access to employer-sponsored health insurance plans. In addition, some early claimers who tried to purchase their own coverage from the individual insurance market were turned down or forced to pay higher premiums due to pre-existing health problems.

Since one provision of Obamacare prohibited insurance companies from denying or cancelling coverage due to pre-existing conditions, many people who retire at 62 will gain access to affordable health insurance that will protect them until they transition to Medicare at age 65, according to the GAO.

How Income Influences Retirement Age

According to the GAO, people who wait until their full retirement age to start drawing Social Security benefits tend to have higher incomes and accumulated wealth, and plan to rely less on Social Security than people who claim benefits at 62.

In fact, the GAO’s analysis shows that the median incomes of people who delayed drawing benefits was 45% higher after claiming benefits than those who claimed at 62, and remained 33% higher when they reached age 72.

Also See: Living Past 90 in America: No Decade at the Beach

Although delayed claimers have higher median Social Security benefits, those benefits make up a smaller portion of household income than for early claimers.

“Even when comparing early and delayed claimers with similar total income after claiming, average household income for delayed claimers was higher at age 72 than for early claimers,” found the GAO.

“However, for both early and delayed claimers, Social Security benefits accounted for an increasing share of total income as they aged.”

How Income Influences Retirement Age

People who delay drawing benefits beyond their full retirement age earn delayed retirement credits, which will increase their monthly benefits when they finally do retire. For example, people born in 1960 or later will earn an 8% delayed retirement credit for every year they wait to start drawing benefits beyond age 67. However, no delayed retirement credit is given after age 69.

Social Security provides a table that illustrates the complex interaction between normal retirement age and delayed retirement credit.

And delaying retirement is exactly what more Americans are doing these days. In July 2014, the Census Bureau reported that in part driven by lingering effects of the last great recession, the percentage of American workers remaining in the workforce beyond age 65 increased from 17.7% for men and 9.4% for women in 2000, to 22.1% for men and 13.8% for women in 2010.

Social Security: Just ‘Some Measure of Protection’

Many people are disappointed to learn that after all those long years of working and paying into the system, their Social Security retirement benefits will replace so little of their pre-retirement income. However, complete replacement of income was never the intent of Social Security.

Instead, as President Roosevelt said when he signed the Social Security Act in 1935, “We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”