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<h1 itemprop="headline">Considerations for Potential Proposals to Change the Earliest Eligibility Age for Retirement</h1>
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<div id="hByline">by <span itemprop="author">Pat Vinkenes, Alice Wade, Mark Sarney, and Tim Kelley</span><br>Policy Brief <abbr title="Number">No.</abbr> 2007-01 (released October 2007)</div>
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<p id="synopsis" itemprop="description">The earliest eligibility age (<abbr class="spell">EEA</abbr>) interacts with many other Social Security program rules, including the benefit formula and insured status requirements. Proposals to increase the <abbr class="spell">EEA</abbr> could affect some or all of these other rules depending on how policymakers design the proposal. By using a hypothetical proposal that increases the <abbr class="spell">EEA</abbr>, this policy brief illustrates how these interactions work and discusses the options that policymakers would need to consider.</p>
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<div class="eightypercent">
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<p>Questions about the analysis should be directed to the authors at <span class="nobr">202-358-6110</span>.</p>
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<p>The findings and conclusions presented in this brief are those of the authors and do not necessarily represent the views of the Social Security Administration.</p>
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<h2>Introduction</h2>
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<p>Individuals can first begin receiving Social Security retirement benefits at age 62. This earliest eligibility age (<abbr class="spell">EEA</abbr>) has remained fixed even as the age for receipt of full benefits—benefits without reduction for "early retirement"—has increased from 65 to 66 and is scheduled to further increase to age 67.<sup><a href="#mn1" id="mt1">1</a></sup> This policy brief is not intended to either advocate or oppose an increase in the <abbr class="spell">EEA</abbr>; rather, it is intended to point out the many design issues that policymakers would need to consider if they chose to develop proposals for increasing the <abbr class="spell">EEA</abbr> in the future.</p>
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<p>For the purpose of this discussion, we consider a hypothetical scenario in which</p>
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<ol>
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<li>the <abbr class="spell">EEA</abbr> is increased from 62 to 65 at the rate of 2 months per year from 2017 through 2034, and</li>
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<li>the normal retirement age, hereafter referred to as the full retirement age or <abbr class="spell">FRA</abbr>, is not changed from that scheduled in current law.<sup><a href="#mn2" id="mt2">2</a></sup></li>
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</ol>
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<p>In this scenario, the policy change would have two effects. First, it would reduce the number of individuals receiving benefits at any point in time, because those individuals affected by an increased <abbr class="spell">EEA</abbr> would not be eligible for retirement benefits as early as before. Second, average monthly benefits would tend to increase, primarily because benefit reductions for early retirement would be smaller. The net effect on lifetime benefits and Social Security financing, however, depends in part on how changes to the <abbr class="spell">EEA</abbr> interact with other parts of the Social Security benefit program, such as the benefit formula and insured status requirements.</p>
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<p>Legislative history and intent suggest that certain aspects of the program are tied to age 62, the earliest age allowed for retired-worker benefits, so changing the <abbr class="spell">EEA</abbr> could create the need to consider other program changes. The bottom line is that the Congress, in making changes to the <abbr class="spell">EEA</abbr>, could choose to make all, none, or any combination of these Social Security provision interactions in the law. This brief discusses these interactions to illustrate the options available to policymakers.</p>
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<h2>Interaction of Social Security Provisions on Increased <abbr class="spell">EEA</abbr></h2>
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<p>Below are several Social Security provisions that could interact with an increase in the <abbr class="spell">EEA</abbr>. Policymakers can change any of these provisions to fine-tune the system financing or distributional effects of <abbr class="spell">EEA</abbr> changes.</p>
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<h3>Primary Considerations</h3>
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<p class="noindent"><span class="h4">Average indexed monthly earnings (<abbr class="spell">AIME</abbr>) wage indexing.</span> The earnings used in the <abbr class="spell">AIME</abbr> are wage indexed up to the second year before the <abbr class="spell">EEA</abbr> (or the age of disability or death, if disability or death occurs before the <abbr class="spell">EEA</abbr>). Under current law, indexing of earnings occurs up to age 60 for retired workers. The <abbr class="spell">AIME</abbr> is used to compute the <abbr class="spell">PIA</abbr> (primary insurance amount), which is adjusted for inflation from the <abbr class="spell">EEA</abbr> (or the age of disability or death, if earlier) forward. Increasing the <abbr class="spell">EEA</abbr> to 65 could result in 3 additional years of wage indexing for earnings used in the <abbr class="spell">AIME</abbr> if policymakers decide to link the two.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> Because wages typically grow faster than prices, this would generally result in higher benefit levels.</p>
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<p>The indexing year was set at 2 years prior to age 62 because data on average wages generally have a lag of up to 2 years. Having the indexing year remain as 2 years prior to <abbr class="spell">EEA</abbr> appears to be consistent with the intent of Congress.</p>
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<p class="noindent"><span class="h4"><abbr class="spell">PIA</abbr> bend point wage indexing.</span> The bend points, which designate the dollar amounts of the <abbr class="spell">AIME</abbr> subject to different factors (90%, 32%, 15%), are set in the year a person first becomes eligible for benefits, usually the <abbr class="spell">EEA</abbr>. Increasing the <abbr class="spell">EEA</abbr> to 65 would result in 3 additional years of <abbr class="spell">PIA</abbr> bend point wage indexing if policymakers decide to link the two.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> This would generally result in higher benefit levels.</p>
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<p class="noindent"><span class="h4">Early retirement reduction factors.</span> A retired-worker benefit is computed when an individual becomes entitled to retirement benefits at or after the <abbr class="spell">EEA</abbr>. If entitlement is before <abbr class="spell">FRA</abbr>, the benefit is determined by multiplying the <abbr class="spell">PIA</abbr> by reduction factors.<sup><a href="#mn3" id="mt3">3</a></sup> Under the proposal to increase the <abbr class="spell">EEA</abbr>, these reduction factors could stay the same as in current law or policymakers could change them.</p>
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<p>Increasing the <abbr class="spell">EEA</abbr> would delay the point at which the individual becomes first eligible for retirement benefits. When the <abbr class="spell">FRA</abbr> reaches 67, there will be up to 5 years of potential early retirement under current law with reduction factors applying to the <abbr class="spell">PIA</abbr>. The total amount of early retirement reduction, of course, increases as the potential months of entitlement before <abbr class="spell">FRA</abbr> go up (for example, the total reduction increases from 13.3 percent for 24 months of early entitlement to 30 percent for 60 months of early entitlement).</p>
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<p>Raising the <abbr class="spell">EEA</abbr> to 65 would reduce the number of potential early retirement years from 5 to 2. A change in the <abbr class="spell">EEA</abbr> would not necessarily require any change in the reduction factors (the total reduction percentage could stay the same for the same number of months of early entitlement). However, the maximum amount of reduction would be reduced because the earliest eligibility would be only 24 months before <abbr class="spell">FRA</abbr>. (For example, under current-law reduction factors, the earliest a retired worker can become eligible for benefits would change from 60 months before <abbr class="spell">FRA</abbr>, with a reduction of 30 percent, to 24 months before <abbr class="spell">FRA</abbr>, with a reduction of 13.3 percent.)</p>
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<p>The reduction factors are currently close to being "actuarially equivalent." This means, for example, that the present value of lifetime retirement benefits determined as of age 62 would be about the same for entitlement at age 62 (with the reduction factors applied) as for that at <abbr class="spell">FRA</abbr> (no reduction factors applied). Of course, policymakers could choose to increase or decrease the current-law reduction factors.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> If reduction factors did not change, monthly benefit levels would be higher for those individuals who would be forced to delay receiving benefits because of the increase in the <abbr class="spell">EEA</abbr>.<sup><a href="#mn4" id="mt4">4</a></sup> However, increasing the factors to compensate for a different length of early retirement could mitigate or eliminate any increases in the monthly benefits resulting from a higher <abbr class="spell">EEA</abbr>. The effect also would depend on any behavioral response and eligibility for other types of benefits.</p>
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<p class="noindent"><span class="h4">Quarters of coverage (<abbr class="spell">QC</abbr>).</span> Currently, the quarters-of-coverage (<abbr class="spell">QC</abbr>) requirements for insured status for retirement benefits are based on the number of years between age 22 and age 62. However, the maximum quarters of coverage required for fully insured status was set at 40 in 1939 when the <abbr class="spell">EEA</abbr> was age 65, which indicates that the <span class="nobr">40-<abbr class="spell">QC</abbr></span> requirement was not intended to be dependent on the <abbr class="spell">EEA</abbr>.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> While an increase in the <abbr class="spell">EEA</abbr> for retired workers to age 65 would not necessarily raise the <abbr class="spell">QC</abbr>s needed, such an increase could result in requiring 43 <abbr class="spell">QC</abbr>s, rather than 40, if policymakers decide to link the two. Some workers who would qualify for benefits under current law would be ineligible under this policy. The effect also would depend on any behavioral response and eligibility for other types of benefits.</p>
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<p class="noindent"><span class="h4">Benefit computation period.</span> The number of years used in computing retired-worker benefits is based on how many "elapsed years" occur between age 22 and age 62. For these benefits, 5 years are typically subtracted from the elapsed years to determine the number of benefit computation years.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> For those workers with no prior period of disability, an <abbr class="spell">EEA</abbr> of 65 would result in an increase from 35 computation years to 38 computation years if policymakers decide to link the two. Without changes in workers' employment, this would reduce benefits.</p>
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<p>Using age 62 as the ending point of the computation period is apparently based on the <abbr class="spell">EEA</abbr> of 62. It was first applied to women in 1956 when they were allowed early entitlement. However, when men were first allowed early entitlement to benefits in 1961, the ending point of the computation period for them at that time was not changed from age 65 to age 62. The ending point for men did not become based on the <abbr class="spell">EEA</abbr> of 62 until the 1972 amendments made it the same as that for women. So, it could be argued that it is now effectively tied to the <abbr class="spell">EEA</abbr> and thus any change to the <abbr class="spell">EEA</abbr> could reasonably result in a change to the computation period.</p>
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<p class="noindent"><span class="h4">Earliest eligibility age for aged surviving spouses.</span> Aged surviving spouses are eligible to receive survivor benefits 2 years earlier than retired-worker benefits, (currently at age 60). Policymakers could decide to maintain this link, which would increase the age of earliest eligibility by 3 years to age 63, if the <abbr class="spell">EEA</abbr> were to rise to 65. Alternatively, policymakers could decide to maintain the age of earliest eligibility for aged surviving spouses at age 60 or to raise it to some other age.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> The effect of maintaining the link between the two <abbr class="spell">EEA</abbr>s would eliminate some benefits currently available to survivors at ages <span class="nobr">60–63</span>.</p>
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<p class="noindent"><span class="h4">Reduction factors for aged survivor benefits.</span> Under current law, total reductions are</p>
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<ul>
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<li>28.5 percent for the earliest age of eligibility (age 60),</li>
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<li>0 percent (or no reduction) for <abbr class="spell">FRA</abbr>, and</li>
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<li>values linearly interpolated between these two values for other eligibility ages before <abbr class="spell">FRA</abbr>.</li>
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</ul>
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<p>Based on the <abbr class="spell">EEA</abbr> chosen, lawmakers would also need to decide on the levels of the reduction factors for aged survivor benefits. For example, lawmakers could maintain the same reduction factors for each early entitlement month. For ages allowed under the proposal, this would mean that total reduction factors applied to aged survivor benefits would be the same as those in current law.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> If reduction factors for survivors are increased, lifetime benefits for those choosing to begin receiving benefits before <abbr class="spell">FRA</abbr> would be lower. Also, monthly benefits for those beginning receipt of benefits at the same age before <abbr class="spell">FRA</abbr> would be lower. The effect also would depend on any behavioral response and eligibility for other types of benefits.</p>
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<p>Note that for survivors, the current increases in <abbr class="spell">FRA</abbr> are not being accompanied by increases in total early entitlement reduction sufficient to maintain actuarial benefit neutrality.</p>
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<p class="noindent"><span class="h4"><abbr class="spell">AIME</abbr> indexing for aged surviving spouses.</span> Under current law, if a worker dies before age 62 and the surviving spouse is under age 60, the surviving spouse is eligible to receive an aged surviving spouse benefit when reaching age 60. The indexing year and <abbr class="spell">PIA</abbr> bend points used in the benefit computation for the surviving spouse may be based on 2 years before either</p>
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<ol>
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<li>the year the worker dies,<sup><a href="#mn5" id="mt5">5</a></sup> or</li>
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<li>the earlier of the year the survivor turns age 60 or the worker would have turned age 62.</li>
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</ol>
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<p>The decision of which of these two years to use for computing benefits is based on the year that yields the higher <abbr class="spell">PIA</abbr>. Generally, the later year yields the higher <abbr class="spell">PIA</abbr>.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> Increasing the <abbr class="spell">EEA</abbr> to 65 could result in up to 3 additional years being added to the year used in the <abbr class="spell">PIA</abbr> formula for indexing earnings and determining bend points. This would generally increase benefits.</p>
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<p class="noindent"><span class="h4">Survivor benefit status.</span> If policymakers decide to link the <abbr class="spell">QC</abbr> requirement for benefit payment to the increasing <abbr class="spell">EEA</abbr>, then there would be some workers dying between ages 62 and 65 who would meet the fully insured status requirement under current law (40 <abbr class="spell">QC</abbr>s) but would not meet this requirement under the proposal. For a worker's survivors to be eligible for benefits under this scenario, the worker's fully insured status would require a quarter of coverage for every year between ages 22 and 65 (or death, whichever is earliest), which could be up to 43 years.</p>
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<p>Like the <abbr class="spell">QC</abbr> requirement for fully insured status, the <span class="nobr">40-<abbr class="spell">QC</abbr></span> requirement for survivors is not necessarily linked to the <abbr class="spell">EEA</abbr>.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> Some survivors would become ineligible for benefits from the deceased worker because the worker would have had less than 43 <abbr class="spell">QC</abbr>s.</p>
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<p class="noindent"><span class="h4">Age requirement for disabled <span class="nobr">widow(er)s</span>.</span> The 1967 Social Security amendments provided benefits for disabled <span class="nobr">widow(er)s</span> at age 50. While this is 10 years before the current <abbr class="spell">EEA</abbr> for aged <span class="nobr">widow(er)s</span>, legislative history indicates that age 50 was chosen to provide these benefits to persons in their 50s. Therefore, since there appears to be no automatic linkage between the earliest eligibility age for aged <span class="nobr">widow(er)s</span> and the eligibility age for disabled <span class="nobr">widow(er)s</span>, policymakers choosing to raise the earliest eligibility age for retirees and/or for aged <span class="nobr">widow(er)s</span> may or may not decide to raise the eligibility age for disabled <span class="nobr">widow(er)s</span>.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> If the age requirement is raised, some disabled <span class="nobr">widow(er)s</span> may not be eligible for benefits.</p>
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<p class="noindent"><span class="h4">Reduction factors for disabled <span class="nobr">widow(er)s</span> benefits.</span> Presently, the maximum benefit reduction for aged <span class="nobr">widow(er)s</span> based on early claiming of benefits is 28.5 percent. Disabled <span class="nobr">widow(er)s</span>, who begin receiving benefits before age 60, receive benefits with this same reduced percentage.</p>
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<p>If the <abbr class="spell">EEA</abbr> for aged surviving spouses was raised to age 63, the reduction for disabled <span class="nobr">widow(er)s</span> could equal the maximum reduction that applies to the aged surviving spouse benefit at age 63. Alternatively, lower reduction factors could apply for some years before age 63.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> The effect on benefits would depend on the decision reached by policymakers regarding the level of the reduction factors that would apply to disabled <span class="nobr">widow(er)s</span> as well as any behavioral response and eligibility for other types of benefits.</p>
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<h3>Additional Considerations</h3>
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<p>Some additional points for consideration if raising the <abbr class="spell">EEA</abbr> are given below.</p>
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<p class="noindent"><span class="h4">Worker benefits.</span> The worker cannot claim retired-worker benefits until reaching the <abbr class="spell">EEA</abbr> but could, if eligible, claim survivor or disability benefits at an earlier age.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> Thus, raising the <abbr class="spell">EEA</abbr> could induce some workers to claim survivor or disability benefits who would have otherwise claimed retired-worker benefits at ages between 62 and the new <abbr class="spell">EEA</abbr>. These auxiliary benefits could be higher than the retired-worker benefits available under current law.</p>
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<p class="noindent"><span class="h4">Survivor benefits.</span> Under current law, if the deceased spouse had received benefits before death, the <span class="nobr">widow(er)'s</span> benefit is limited to the larger of (1) 82.5 percent of the deceased worker's <abbr class="spell">PIA</abbr> or (2) the amount that the deceased spouse would have received if he or she were still alive.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> Raising the <abbr class="spell">EEA</abbr> would result in some workers delaying retirement and thus a higher limit could apply. The higher limit could yield a higher benefit for some survivors.</p>
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<p class="noindent"><span class="h4">Delayed worker benefits for <span class="nobr">widow(er)s</span>.</span> Currently, <span class="nobr">widow(er)s</span> may claim <span class="nobr">widow(er)</span> benefits but delay taking their worker benefit until the <abbr class="spell">FRA</abbr> to avoid the worker reduction factors. They can then receive the full worker benefit at the <abbr class="spell">FRA</abbr>, which in some cases will be higher than the <span class="nobr">widow(er)</span> benefit. This effectively allows them to avoid a permanent reduction for taking any kind of benefit before the <abbr class="spell">FRA</abbr>.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> Depending on the relative benefit levels and <abbr class="spell">EEA</abbr> for <span class="nobr">widow(er)'s</span> benefits and retired-worker's benefits, there may be a greater incentive to file for <span class="nobr">widow(er)'s</span> benefits at the earliest age if the <abbr class="spell">EEA</abbr> were increased.</p>
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<p class="noindent"><span class="h4">Defined benefit pensions.</span> This policy brief focuses on the interactions between the <abbr class="spell">EEA</abbr> and other Social Security provisions. We note that Social Security's <abbr class="spell">EEA</abbr> also interacts with provisions in some defined benefit pension plans. For example, some plans decrease pension payments when a participant attains the <abbr class="spell">EEA</abbr>.</p>
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<p class="noindent"><span class="h5">Benefit effect:</span> No effect on Social Security benefits, but could change the payout scenario from the defined benefit pension.</p>
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<div id="notes">
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<h2>Notes</h2>
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<p> <a href="#mt1" id="mn1">1</a>. For a complete description of the Social Security benefit calculation, see <abbr class="spell">SSA</abbr>'s benefit calculators at <a href="/OACT/anypia/index.html">http://www.socialsecurity.gov/OACT/anypia/index.html</a>.</p>
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<p> <a href="#mt2" id="mn2">2</a>. This hypothetical scenario was one provision of the 2005 comprehensive proposal developed by Jeffrey Liebman, Maya MacGuineas, and Andrew Samwick (available at <a href="/OACT/solvency/">http://www.socialsecurity.gov/OACT/solvency/index.html</a>).</p>
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<p class="secondpara">The full retirement age refers to the age at which a person may first become entitled to unreduced benefits. For persons reaching age 62 before 2000, the <abbr class="spell">FRA</abbr> is 65. It will increase gradually to 67 for persons reaching that age in 2027 and later.</p>
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<p> <a href="#mt3" id="mn3">3</a>. Under current law, the reduction factors are 5/9 percent per month for the first 36 months of early benefit receipt and 5/12 percent per month for the next 24 months of early benefit receipt.</p>
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<p> <a href="#mt4" id="mn4">4</a>. Assuming no additional work, lifetime benefits, on average, would be about the same.</p>
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<p> <a href="#mt5" id="mn5">5</a>. Assumes the worker was not entitled to disability benefits during the <span class="nobr">12-month</span> period before death.</p>
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