Retiring Early – Will It Seriously Impact Your Social Security Benefits?

by | Last updated Jul 4, 2023 | Published on Mar 25, 2014 | Healthcare News

Social Security Benefits
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According to the Social Security Administration (SSA), social security benefits will be increased to a certain percentage depending upon your DOB (date of birth), if you hold off the benefits until after your normal retirement age. The benefit amount will be increased until you start receiving the benefits or reach 70 years of age. So what if you want to retire early? Does it entail losing thousands of dollars earned during the period between the stipulated retirement date and the full retirement age? If you have completed 35 years in your profession, it will not have a major impact on your social security benefits even if you are retiring before your normal retirement age.

To be more specific, the Social Security Administration calculates the amount of retirement benefits according to the workers’ wage history using their average indexed monthly earnings, or AIME. As per the current formula, the AIME is computed on the basis of workers’ earnings subjected to Social Security taxes during their highest 35 years of earnings. If a person has worked less than 35 years, the average will include years with zero earnings. Thus, if you retire before 35 years at an age less than full retirement age, it can seriously impact your social security benefits.

CNN money gives a good example to illustrate this. Consider a person retiring at 63 instead of at the full retirement age 66. If he makes $100,000 at 63 and received a 3% rise annually over 35 years of working, continuing for three more years would raise the monthly benefit to $41 or 1.6%. However, if that person makes the same amount of money and has worked only 32 years, leaving early would involve losing more because he will be losing $119 a month or 4.8%.

The Congressional Budget Office (CBO) plans to lengthen this AIME computation period to three years as an option to reduce the deficit: 2014 to 2023, which will take effect in January 2015. The averaging period will be extended to 36 years for people who will turn 62 in 2015, to 37 years for people who will turn 62 in 2016, and to 38 years for people who will turn 62 in 2017 and beyond. This extension of the computation period would reduce the benefits by requiring that additional years of lower earnings be counted in the benefit computation. This option would not change the number of years used to calculate AMIE amounts for disabled workers. However, retirement benefits would be affected. This option would impact people who worked for less than 38 years, since additional years with no earnings would be included in the benefit calculation. It would reduce the benefits for people who worked 38 years or more since they would have lower average earnings when it comes to the additional computation years than they would have in their highest 35 years of earnings.

An argument quoted by CBO for extending the computation period is the increased life expectancy of people. As the life expectancy increases, the number of aging people will also increase. As a result, there will be increased spending for Social Security as increase in Medicare at the same time (As per SSA, if you are receiving Social Security benefits when you turn 65, your Medicare Benefits will begin automatically). It is estimated that the combined spending on Social Security and Medicare will rise from 8% of the national income (gross domestic product) to 13% from 2004 to 2030. CBO estimates extending the computation period to three years would reduce federal outlays by $43 billion through 2023.

Since the Medicare premiums are deducted from social security gross amount, healthcare providers should have an understanding about the AIME computation period of their Medicare patients. As it is a tedious task, they can seek help from a professional medical billing company having expertise in medical billing and insurance verification to verify the patients’ documents.

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