For most people, Social Security represents a baseline of retirement income. Depending on where a retiree settles, it can be a difficult prospect to live solely on this outlay without significantly curtailing quality of life.
To maintain the integrity of the Social Security funding pool, the federal government makes the time of individual eligibility for full benefits fall between the 66th and 67th birthday. However, for those 62 and older wishing to retire before this period, the Social Security Administration does afford payments, albeit less than the full benefit.
Employers can augment pension disbursements to make up for diminished Social Security in lieu of full compensation. This is known as leveling.
How Does Social Security Leveling Work?
Many companies and public agencies offer the Social Security leveling option to those employees going for early retirement. If a public works machinist, for example, decides to retire at age 62, he can count on his or her pension as well as Social Security.
If the monthly Social Security payout is $1,000 at age 67, according to the Social Security Administration it could be reduced to $700 since the worker is collecting for five years before that age. If, meanwhile, the pension is set at $1,500 per month for life, the pension administrator can re-calibrate it to $1,800 for the five years of reduced Social Security.
If the machinist waits until he reaches 67, the full Social Security benefit is realized, while the pension payment remains $1,500. Leveling, then, works as follows: $1,800 (augmented pension) per month + $700 (reduced SS) per month = $2,500. At age 67, $1,500 (regular pension) per month + $1,000 (full SS benefit) per month = $2,500. This way, the retiree receives a payment that is constant.
This helps people who like to plan financially with a consistent income. The Social Security benefit, nevertheless, often remains fixed at the lower amount.
Is the Pension Plan Losing Money?
It appears as though, in the process of pension leveling, the pension plan pays out more than if the employee waited to retire. Worth remembering, however, is that pensions constitute only a portion of carrying a workforce. Agencies and companies are often under pressure to bring down payroll costs and, especially, health care costs.
Replacing older associates with newer ones allows them to re-structure positions at lower wages. On balance, they do well to provide a counterweight to scaled-down Social Security compensation in the effort to save money with their active labor force.
Pros and Cons of Early Retirement
On the whole, is Social Security leveling a good idea? For one thing, recipients get their money earlier. Good health notwithstanding, the hazards of aging can creep up quickly. No years are guaranteed, so investing in life, and having the cash to do so, has its attractions.
In any event, a 62-year-old often has the capacity to go more places and do more things than an 85-year-old. Does the old adage need to be said again? "You can't take it with you."
That said, some people live very long lives, and are in relatively good health. Claiming Social Security benefits at 62 may doom the claimant to lower payments than otherwise waiting until age 67. Although a retiree might expect to live more modestly when older, life can be more limited when there is less to spend.
The calculations work differently for each individual, so scenarios can differ from person to person. The best strategy, accordingly, is to consult a seasoned financial advisor to help decide on whether early retirement is wise. If you want to see how much you will receive in retirement in Social Security benefits, the Social Security Administration provides a handy calculator.
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.