Reader question: “I will be 66 next July. I want to begin collecting Social Security in January, if possible. I believe that I can begin receiving benefits in January, minus roughly 3.3%, per SSA formula. Then, beginning in July, it will ramp up to the full amount, plus the SSA will add back the total amount deducted between Jan-June into my monthly benefit over the next 15 or so years. Is this how it works?”
Early Filing vs Earnings Test Reductions
Unfortunately, no, this is not quite how it works. You are combining what happens when you file early vs. what happens when you lose benefits due to the Earnings Test.
One is Permanent
For your scenario, when you file 6 months before your full retirement age (66), your benefit will be PERMANENTLY reduced by 5/9 of 1% for each month you are filing early, or 3.33%. This reduction is permanent if you continue to collect benefits uninterrupted into the future. If those benefits are interrupted by either the earnings test, or by you suspending your benefits voluntarily, the story changes.
One is Not
Between January and July you will be subject to the earnings test if you are still earning wages from work. If you exceed the earnings limit for the year, you may have benefits withheld. In that scenario, they will re-calculate your benefits when you reach age 66 and adjust your benefit to compensate for the benefits withheld. This is where your comment of “add back the total amount deducted between Jan-June into my monthly benefit over the next 15 or so years” comes in.
Offsetting Early Filing
After you reach your full retirement age, you have the right to voluntarily suspend your benefits. If you do that you will begin to accrue “delayed retirement credits” that are equal to 8% per year you remain suspended until you reach age 70. Therefore, even though you created a reduced benefit by claiming 6 months prior to your FRA, you could effectively offset that reduction by later suspending your benefit for as long as you want to earn those delayed retirement credits. To completely offset your early claiming reduction you would have to suspend at least 5 months.
Thanks for the great question!