By Mark Miller
(Reuters) – Should you keep working as you get older, or retire and claim Social Security when you first become eligible for benefits? Some people do both, and not necessarily by choice.
Twenty percent of older workers claim Social Security as soon as they become eligible at age 62 – and while they are still working, according to new research by the Schwartz Center for Economic Policy Analysis at the New School in New York. The finding challenges the longstanding belief that the decision on when to claim Social Security revolves around retirement, said Teresa Ghilarducci, director of the center and co-author of the study.
Ghilarducci found that low-income older workers are more than three times as likely as high-income workers to claim early, relying on Social Security to supplement their wages – and not because they are misinformed about the benefits of later claiming. “Most of them are doing it because they need the money to supplement their low wages and maintain their standard of living,” she said.
The finding is striking because one possible policy solution to the looming shortfall in Social Security revenue is an increase in the full retirement age (FRA) – that is, the point when workers can receive 100% of the benefit they have earned.
Advocates for a higher FRA argue that we are all living longer, and therefore should also work longer before retiring and claiming Social Security. Delayed claiming often does make sense for better-educated, higher-income workers. But for everyone else, not so much.
High-income, well-educated people have enjoyed large increases in life expectancy, while those whose incomes and levels of education are low have enjoyed almost no gains at all. That means they will not live long enough to enjoy the benefits of delayed claiming. And a higher FRA would mean a substantial across-the-board benefit cut that would be especially painful for those who find themselves forced to claim early.
WHY TIMING MATTERS
The Social Security rules are designed to pay everyone roughly the same lifetime benefit, no matter when you decide to claim benefits, according to the life expectancy tables. So if you claim at age 62 your monthly benefit will be considerably smaller than if you claim at age 66. Conversely, a later claim will give you a higher monthly benefit. If you claim before your FRA, your initial benefit will be reduced a certain amount for every month you claimed early. If you file 60 months before FRA, for example, your benefit is reduced by 30% – permanently. If you delay your claim beyond FRA, you receive a delayed retirement credit, for every month of delay, up to age 70.
A person with an FRA of 66 who claims at age 62 will receive a benefit reduced by 25% for the rest of his or her life. Claiming at FRA is worth 33% more in monthly income than a claim at 62, and a claim at age 70 is worth 76% more.
While the system is designed to be “actuarially fair” no matter when you claim, it does benefit those who can delay their claim and are more likely to enjoy greater-than-average life spans. Moreover, some researchers have found that the current formula should be updated. They argue that early claiming reductions have become too punitive and the delayed credits too generous. The Social Security Administration’s claiming formula traces its roots to the mid-1950s, and underlying actuarial factors have changed. Interest rates have fallen and life expectancy has risen – but much more so for high earners.
(People who claim benefits while they work and have not yet reached their FRA also are subject to the Social Security retirement earnings test – a formula that withholds a portion of benefits if your wage income exceeds a certain level. This year, the threshold is $21,240.)
THE LOOMING REFORM DEBATE
Social Security’s retirement trust fund reserves are forecast to be depleted in 2033. At that point, the current revenue coming in would be sufficient to pay 77% of promised benefits. In other words, there would be an immediate, across-the-board benefit cut of 23% – not only for current retirees, but for workers who retire down the road.
Solutions to the problem offered by political centrists and conservatives often call for a mix of new revenue and a gradual increase in the FRA, to 70. Political progressives favor injection of new revenue to address the problem, such as raising or eliminating the cap on wages subject to the payroll tax. In the last round of Social Security reform – in 1983 – we gradually raised the FRA from 65 to 67. (For everyone born in 1960 and later, the FRA is 67).
A higher FRA functions as a benefit cut, because it raises the bar on how long people must wait to receive their full, earned benefit. The 1983 cuts effectively cut benefits by 13%across the board. Raising the FRA to 70 would be a cut of roughly 20%.
Ghilarducci’s research shows that for some, working longer to clear that bar is not about improving long-term retirement outcomes. Instead, it is simply about survival. “These are working people who are just trying to help themselves stay afloat,” she said.
(Writing by Mark Miller; Editing by Matthew Lewis)