Social Security was designed to replace income once people could no longer work. In the 1930s, the retire- ment age was set at 65, which coincided with the age used by many private and public pension plans. In the late 1950s and early 1960s, Congress changed the law to enable workers to claim benefits as early as 62. But benefits claimed before 65 were actuarially reduced, so that those who claimed at 62 and those who claimed at 65 could expect to receive about the same total amount in benefits over their lifetimes.
In the early 1970s, Congress introduced the Delayed Retirement Credit, which increased monthly benefits for those who claimed after the so-called Full Retirement Age of 65. That credit, which was modest at first, now fully compensates for delayed claiming. As a result, lifetime benefits are roughly equal for any claiming age between 62 and 70, and the highest monthly benefits are available at 70. In that regard, 70 has become the new 65. Moreover, the level of monthly benefits at 70 appears appropriate given the increased deductions for Medicare premiums, the greater taxation of benefits, the declining importance of the spouses’ benefit, and the diminished sources of other retirement income. This brief aims to clarify Social Security’s current benefit structure.
The brief’s key findings are:
- Due to increases in Social Security’s Delayed Retirement Credit, the effective retirement age is now 70, with monthly benefits reduced for earlier claiming.
- Benefit levels at 70 appear appropriate given that rising deductions for Medicare and greater benefit taxation have reduced Social Security’s net replacement rates.
- The shift to 70 should be feasible for many workers given increases in lifespans, health, and education.
- But vulnerable workers forced to claim early will have low benefits and will be particularly harmed by any further cuts.
Policymakers need to inform those who can work that 70 is the new retirement age and devise ways to protect those who cannot work.
The maturation of the Delayed Retirement Credit has created a new Social Security benefit structure. Work- ing until 70 is the way for people to have an adequate benefit on which they can build for a secure retire- ment. The shift to age 70 may be appropriate given the increase in life expectancy, health, and education for the majority of workers, but it will lead to low replacement rates for the many workers who retire early. Further cuts in benefits by extending the “Full Retirement Age” will lead to very low benefits for early retirees.
This discussion is not to argue that Social Security benefits can never be cut. People are healthier, better educated, have less physically demanding jobs, and can work longer. They are also living much longer. So keeping monthly benefit levels unchanged results in ever increasing costs. But constantly reducing benefit levels by increasing the Full Retirement Age is very hard on those who cannot change their retire- ment date. If we want to cut benefits, it makes much more sense to directly change the benefit formula. Such an approach allows for larger cuts for the higher-paid than for those at the bottom of the earn- ings distribution.
Eliminating the Full Retirement Age would dramatically clarify Social’s Security benefit structure. It would clearly signal that claiming at age 70 provides the appropriate benefit and would encourage people to work longer. Eliminating the concept would also force policymakers to call a cut a cut, and perhaps target reductions where they would cause less pain.
Chosen excerpts by Job Market Monitor. Read the whole story at
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