Offer more Social Security choice to workers phasing into retirement

Deciding when and how to retire is already a difficult challenge. Allowing more choice in claiming Social Security benefits will help make that decision easier for many U.S. workers. 

The rules governing the claiming of Social Security benefits are outdated and fail to accommodate the modern labor market. Today, U.S. workers are increasingly embracing the concept of phased retirement, whereby they gradually decrease their working hours before moving into full retirement.   Yet these workers are forced by current law to make an “all-or-nothing” choice in claiming Social Security benefits. A more flexible system can better support older workers who want to gradually transition into retirement.

Allowing workers to claim only half of their Social Security benefits at any time between ages 62 and 67 will be a major boost to those workers who want to keep working part-time, but also depend on Social Security benefits to maintain a reasonable standard of living. This reform, coupled with exempting these workers from the annual earnings test, is a crucial step to modernizing the program.

Most workers today want to gradually ease into retirement. When workers are asked about their retirement plans, the overwhelming majority say they don’t want to go straight from working full-time to not working at all. According to a recent survey sponsored by Principal Financial, 63 percent of current workers said they wanted to gradually reduce their working hours or slowly wind down their jobs. 

Workers can always delay benefits entirely, but that comes at a significant cost — especially for those who need to supplement their income. When older workers hold part-time jobs, many need Social Security benefits to provide enough income to maintain their standard of living. In 2019, over 2.2 million U.S. workers below normal retirement age of 67 received both earned income and Social Security benefits. Of this number, almost 1.5 million earned less than $25,000 per year. 

For these part-time older workers, this “all-or-nothing” choice can present an agonizing decision. If they claim all their Social Security benefits at any age before normal retirement age of 67, they will be forced to accept lower benefits for the rest of their lives. But delaying benefits can mean a sharp decline in their standard of living, or even difficult choices between buying enough groceries and making a mortgage payment. 

Let’s take a worker with average earnings of $60,000 over the last 35 years (indexed to inflation). If this worker claims Social Security benefits at 62 — the earliest possible age — they will receive only $1,540 per month for the rest of their lives. By contrast, waiting to claim Social Security benefits until the normal retirement age of 67 would boost their monthly benefits to $2,200 perpetually. And if such workers waited until age 70—the highest age for claiming Social Security benefits — they would receive $2,728 per month perpetually.  

Instead of such rigid options, Social Security should give workers more choice by allowing them to claim half of their benefits before normal retirement age.  Here’s how this proposal would operate for our worker with $60,000 in career earnings in 2023. He or she could choose to claim half of their early Social Security benefits at age 62, which would be $770 per month (half of $1,540) to supplement their lower earnings from reduced working hours. Then at age 67, they could claim the other half of their Social Security benefits and thereby boost their monthly benefit for the rest of their lives to $1,870 — as compared to $1,540 for workers who claimed all their benefits at 62. Alternatively, they could wait until 70 to claim the other half of their Social Security and thus enjoy monthly benefits of $2,134. 

Exempting workers who choose to claim half their Social Security benefits from the annual earnings test is an important complement to this proposal. In 2023, that test reduced Social Security benefits by $1 for every $2 in annual earned income above $21,240 before age 67. Suppose our worker claims Social Security benefits at age 62 and then earned $33,560 per year for the next five years. That worker would lose $6,160 of benefits each year under the earnings test ($33,560 minus $21,240 equals $12,320 divided by two.) 

The annual earnings test is widely misunderstood. It has the effect of discouraging some workers receiving Social Security benefits before age 67 from seeking part-time jobs. Several studies have shown that Social Security recipients tend to keep their annual earnings at or below the level at which they start to lose $1 in benefits for every $2 in earnings. 

However, Congress has provided that workers losing Social Security benefits due to the earnings test be made actuarially whole by increasing their monthly benefits from age 67 onwards. Hence, there is no good reason to keep the annual earnings test for workers receiving half their benefits between the ages of 62 and 67. Though the test causes a lot of confusion, it has no material effect on Social Security solvency.

Congress should put an end to the “all-or-nothing” choice currently confronting retirement-age households. Many are accepting much lower Social Security benefits for life because they need monies to supplement their lower earnings as they move into phased retirement between ages 62 and 67.  Yet they will also temporarily lose part of their early Social Security benefits if their annual earnings exceed a relatively low limit during these five years — another disincentive to phased retirement. 

Deciding when and how to retire is already a difficult challenge. Allowing more choice in claiming Social Security benefits will help make that decision easier for many U.S. workers. 

Robert C. Pozen is a nonresident senior fellow with Brookings and a senior lecturer at MIT School of Management.