In 2022, the National Bureau of Economic Research (NBER) published a paper titled: “How Much Lifetime Social Security Benefits Are Americans Leaving on the Table?” The answer to that question was surprising.

The authors determined more than 90% of workers aged 45 to 62 would optimize lifetime benefit income by claiming Social Security at age 70. However, less than one-tenth of people actually wait that long, and the authors estimated the resultant median loss in lifetime benefits at more than $225,000.

In short, workers pay a high price for overlooking two Social Security rules concerning the impact of claiming age on benefit payments. Read on to learn more.

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How Social Security benefits are determined

A recent survey from Nationwide Retirement Institute found that more than half of adults don’t know exactly how to maximize their Social Security benefit. That misunderstanding could lead to hundreds of thousands of dollars in lost benefit income in retirement. In fact, the NBER publication estimates the median worker aged 45 to 62 will see a 10% reduction in lifetime spending power if they fail to maximize their Social Security income.

However, workers that understand how Social Security is calculated — especially how claim age impacts payments — can make informed decisions. In that scenario, many people may still choose to claim early and collect a smaller benefit, but any loss in spending power would be voluntary rather than a consequence of misunderstanding.

Social Security retired-worker benefits depend on lifetime income and claiming age. First, inflation-adjusted income is run through a formula to calculate the primary insurance amount (PIA) for each worker. The PIA is the benefit a worker will receive if they claim Social Security at full retirement age (FRA), which is 67 for those born in 1960 or later.

Second, the PIA is adjusted for early or delayed claims. While retirement benefits can start as early as age 62, workers that start Social Security before FRA receive a reduced benefit, meaning less than 100% of their PIA. Likewise, workers that start Social Security after FRA get an increased benefit, meaning more than 100% of their PIA.

The overlooked Social Security rules that could add 77% to retired-worker benefits

I mentioned collecting Social Security earlier than FRA results in a reduced benefit, and starting Social Security later than FRA results in an increased benefit. That brings me to the overlooked Social Security rules that could increase retired-worker benefits by up to 77%. The rules in question explain how claiming age correlates with benefit reductions and increases.

• Rule 1: When workers claim Social Security before full retirement age, benefits are reduced by five-ninths of a percentage point (about 0.55%) per month for up to 36 months. Benefits are reduced by five-twelfths of a percentage point (about 0.42%) per month thereafter.
• Rule 2: Workers that claim Social Security after full retirement age earn delayed retirement credits that increase their benefit by two-thirds of a percentage point (about 0.67%) per month. Delayed retirement credits stop accumulating at age 70, so it never makes sense to claim later.

Let’s apply those rules to a hypothetical scenario. Last year, newly awarded retired workers had an average PIA of $2,042. Using that figure, a hypothetical worker born in 1960 or later would receive $2,042 per month if they claim Social Security at FRA. Here’s how that figure would change if they claimed at ages 62 and 70.

• The hypothetical worker would receive $1,429 per month if they claimed at age 62. That’s because they started Social Security five years before FRA, reducing their PIA by 30%. To elaborate, 36 months multiplied by five-ninths of a percent, plus 24 months multiplied by five-twelfths of a percent, equals 30%.
• The hypothetical worker would receive $2,532 per month if they claimed at age 70. That’s because they started Social Security three years after FRA, increasing their PIA by 24%. To elaborate, 36 months multiplied by two-thirds of a percent equals 24%.

The dollar amounts will vary based on individual circumstances, but the percentages will remain constant. In other words, workers can increase their retirement benefit by 77% — $2,532 divided by $1,429 — by claiming Social Security at age 70 rather than age 62. Unfortunately, most people either misunderstand or overlook the Social Security rules concerning claim age. In fact, over 90% of new retired-worker beneficiaries started Social Security before age 70 last year.

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