Several people have said to me that if I were to retire early then I would lose out on a great deal of Social Security benefits.  The fact is that the earlier I retire the more return I would receive from Social Security.  Here is the reason why those who want to get more from Social Security should retire early.

First of all, I am still 40 years from what Social Security calls the “full retirement age”.  That is when I can collect 100% of the benefits I am entitled to.  In 40 years I have no idea whether or not this program would be around.  If it is not going to be around anymore then it seems to make sense to pay as little into it as possible.

Next there’s the issue of how your retirement benefits are calculated under Social Security.  Basically, the calculations work out so that those who pay more will get less of a return on what they paid.  Here is theof how Social Security benefits are calculated this year.

Using that worksheet lets do a real example of two hypothetical people that both start working in 1991 and reach their full retirement age in 2010. (This is possible since some immigrants start working in America later in life.)  Suppose person A works for 10 years from 1991 to 2000, and person B works for 20 years from 1991 to 2009.  Also suppose that they both start off with a salary of $32,000 per year and get a raise of 2% per year. The is that person A has a monthly benefit of $866.49, and person B has a monthly benefit of $1180.58. So basically, person B paid more than twice the taxes as person A, but has a benefit of only 36% more.  Why isn’t it 100% more?   The reason is that the formula is meant to replace more income of a person with lower lifetime earnings.   It’s pretty easy to see that this is a system of diminishing returns, and it is better to retire early if you can because the rate of return you get on your taxes would be higher than if you retired later.

Finally I think a lot of people have a misconception of how Social Security works.  All the money we are paying now are going to current retirees.  None of the money is being saved into an account like a 401k.  So in the future the benefits we collect will come from younger folks.  It is supposed to be an insurance system since a lot of people die before ever collecting any benefits, but it is really another system that forcibly transfers income, and there is no point in paying for it more than you have to.

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