Social Security's Math Is Changing This Year. Here's What to Look For

If you will celebrate your 62nd birthday in 2017 or soon after, you're in the vanguard of a big change in Social Security: Starting with people hitting that milestone in January, the full retirement age (FRA)—that is, when you can collect your entire earned benefit—will creep up from 66 to 67 in two-month increments over the next six years.

You'll still be able to begin your Social Security payments as young as 62. And, like now, you'll be assured of getting a larger check for each month you delay up to age 70. But here's the rub when the FRA goes up: "At every age along the line you are receiving a smaller benefit" than you would have before, assuming the same work record, says Jim Blankenship, a financial planner and author in New Berlin, Ill.

Surprised? That's not the only unexpected math you may encounter when you're deciding when to claim Social Security, whether you should work longer, and whether you would benefit from a retirement job. To make the smartest decisions, here's what you need to know about the tricky math of Social Security.

Waiting Until Age 70 to Claim Now Means a Smaller Bonus

From the perspective of a future retiree, the increase in the full retirement age is a benefit cut, as you can see below.

Say you want to start collecting at age 65. That is 12 months early if your FRA is 66, but 24 months early if your FRA is 67, meaning you take a bigger haircut. With an FRA of 66, you can get 75% of your full benefit if you begin at 62; with an FRA of 67, that portion drops to 70%. Similarly, if you claim at age 70, you'll get 124% of your benefit when the FRA is 67, vs. 132% before.

What's behind this shift? The FRA—the age at which you can start collecting without a reduction for early retirement or added credits for delaying—was 65 when Social Security began in 1935. A 1983 law pushed the FRA to 66 for people born between 1943 and 1954 and 67 for those born in 1960 or later.

"That is fair," says Bill Reichenstein, a finance professor at Baylor University, given that life expectancy has been increasing by about one month a year. Without periodic increases in the FRA, Social Security would pay each generation more as a result of longer lives—a financial problem for a system that has to pay for itself over time, he says. (Yes, odds are that Congress will boost the FRA for future retirees whenever it faces up to the looming shortfall in Social Security's funding.)

Chances Are You Can't Collect Right at Age 62

Did you know that only around 7% of people can really start Social Security the month they turn 62? While the Social Security Administration, financial planners, and journalists regularly talk about age-62 benefits, people who weren't born on the first or second day of a month can't claim until the month after they celebrate their birthday. If you have an FRA of 67 and start at 62 and one month, you would get 70.4% of your full benefit. And whatever your first month of benefits, you will actually see the first payment in the following month.

A Bigger Paycheck Next Year May Not Boost Your Benefit

If you are approaching retirement after a full career, staying on the job may do surprisingly little to juice your benefit. As you can see in the following graphic, a long-tenured worker who keeps going until 70 vs. retiring at 62 would enjoy a benefit boost of less than 7% based solely on all that toil.

Why is that? For one, your Social Security check is based on your pay in your 35 highest-earning years. A new year's number is at best a small element in that average. Plus, in doing the math, the salary you earned 20 or 30 years ago is adjusted upward to reflect the climb in average wages over time. So what you earn in 2017 or 2018 might not even knock out an earlier indexed number—particularly if you scale back to part-time.

And while that work may have little or no effect on your future Social Security check, Reichenstein points out, you could pay thousands of dollars in Social Security tax on those earnings in the meantime.

That's not to say a job isn't valuable, though. Continuing to bring home a paycheck may be the only way you can afford to put off collecting Social Security—and that deferral is the powerhouse, guaranteed route to increasing your check. Delaying is a worthy goal if you are the higher earner in a couple or a healthy single whose relatives have lived long lives. It helps protect you from outlasting your money and potentially generates higher income for a surviving spouse.

If you're turning 62 in 2017, with an FRA of 66 and 2 months, each year of waiting will boost your payout 6.5% to 8.1%. If you claim at 70, your first check will be about 75% greater than it would have been at 62—before figuring in any cost-of-living adjustments and without you earning even $1 after you turn 62. Those guaranteed increases are "very valuable in a low-interest-rate, low-inflation environment," says James Mahaney, a Social Security specialist at Prudential Financial.

While it can be smart to keep working to reap those rich boosts, conversely, if your nest egg is big enough to cover the gap, you could stop work sooner than expected but still start Social Security later.

With a Career Gap, Even Part-Time Work Can Pay Off

Retiring in your sixties simply may not be feasible for you, especially if you took breaks from the workforce that are depressing your eventual benefits. If so, you may be among those who can get a noticeable boost to your Social Security from continued labor.

With fewer than 35 years of earnings, staying on the job could make a big difference because your average includes years of zero pay. For a woman who stayed home to raise children, for instance, "every additional year she works, one of those zeros drops off," says Gail Buckner, a vice president at Franklin Templeton Investments.

You can see that in the graphic above, which looks at two hypothetical 60-year-olds dubbed Ida and May, after Ida May Fuller, the first person to collect a monthly Social Security retirement check. To isolate the payoff for continued work alone, not delayed claiming, we assumed each woman would start Social Security at age 70, regardless of when she stopped work. Ida, earning $100,000 after a lengthy career, would get less than a 7% boost to her Social Security by continuing to work full-time from 62 to 70. What's more, she would see no benefit from shifting to part-time work at 66 compared with kicking back altogether at that age.

By contrast, May, earning $40,000 with a career that includes a 17-year break, would get an 18% bigger check from working full-time to 70. And she would see her check grow even if some of her work was part-time. (To analyze your own numbers, download the "detailed calculator" from Social Security's website, ssa.gov.)

What's more, additional pay can be particularly valuable for low earners like May because Social Security replaces a larger percentage of income than it does for high earners. It can also help if you had many years of low wages but are now making close to or more than the maximum pay on which Social Security tax is collected. That cap will be $127,200 in 2017, up from $118,500 in 2016.

One final thought on Social Security math: You generally need to have worked for 10 years to qualify for a benefit on your own record. So if you're shy of that milestone, that's another reason to get out of bed in the morning and keep showing up at the office.