I have a short piece in the New York Times about those who draw Social Security benefits before the “normal” retirement age–traditionally age 65, raised in 1983 to 66 this year, and rising to 67. However, in the early 1960s Congress allowed people to begin drawing lower benefits as early as age 62. These days, two thirds or more of those on Social Security begin drawing benefits well before the normal retirement age.
The point of my article is that raising the normal retirement age is no panacea for Social Security’s financial problems. In fact, it really makes no difference when people retire because benefits are actuarially adjusted so that theoretically everyone gets the same lifetime benefits. Indeed, benefits continue to rise 8% per year past the normal retirement age because of something called the delayed retirement credit. Therefore, if the goal is to improve Social Security’s finances, raising the normal retirement age won’t do much good because 62 has become the de facto normal retirement age. We will have to raise the early retirement age if we want to save money this way.
There are two other points I didn’t have space to make that are important. First, I think many people who take early retirement foolishly have a use-it-or-lose-it attitude; they don’t realize that benefits rise the longer one waits. I think many also believe that their benefits will be bumped up when they reach the normal retirement age. But the lower benefits one gets when taking early retirement are for life. Consequently, I fear a crisis of poverty among the very old in the not too distant future.
Second, there is an important cost associated with early retirement in the form of restrictions on earned income. Social Security benefits are reduced $1 for every $2 earned above $14,160. That’s like a 50% tax that discourages people from working once they have decided to take early retirement. I think this also contributes to poverty among the elderly. The earnings test was abolished a few years ago for those above the normal retirement age. But as the normal retirement age rises, it impacts more and more people.
In short, any debate over raising the age to qualify for Social Security must include discussion of raising the early retirement age. Personally, I think 62 is too early for anyone in good health to retire.
I agree, 62 is too young to start taking Social Security, and people really don't understand the penalty they impose upon themselves. In addition to raising the minimum age for retirement, it's absolutely mandatory that we raise the income cap in withholding, so upper-income folks pay the same percentage in Social Security taxes as the rest of us! These 2 steps will go far to shore up SS, even though it's perfectly sound for many years to come, even if we don't do a thing. Too much fear-mongering going on in the media, convincing people they'll lose their SS if they don't apply as soon as they can.
This discussion has many nuances: fear, health, security, poverty. Picking one over the other doesn't reduce the impact of the other. Sixty-two has become the new retirement age because of fear (that the program will not be there after decades of contributions) and diminished retirement investments (we all know why all too well the reasons, and there are many, for that). They take it whether they need it or not. But many need it.
Instead of increasing the age for early retirement benefits, something you suggest as actuarially adjusted, SS could offer a program that secures those benefits at 62, sort the same way you need to sign up for medicare at 65 whether you need it or not, and guarantees the benefit without paying out anything until the person actually retires. A healthy individual could continue working knowing that the benefit is secure and increasing each year they wait. This would work the same way as the payback program already in place where someone begins withdrawal at 62, saves all of the benefits and then pays it back at full retirement age to receive the higher benefit.
I think the income limit does two things: keeps the retiree from working too much which keeps the job market growing. Benefits are only taxed once all of the income is added in and the threshold is breached – $25k for singles, $32k for married filing jointly. Suppose a married couple calculated their taxable retirement benefits, their taxable income and the SS benefits and found they could live comfortably on $32k, they would be still well above poverty. If they had used a Roth IRA or a Roth 401(k) to hedge against this tax issue, they could increase their income substantially without any impact on the benefit. And secondly, it taxes those that can afford to be taxed and in all likelihood, they are the very ones who will ladder their retirement income, drawing on accounts as needed – perhaps pensions first, deferred investments later and SS last.
The argument for living longer is the biggest fear most average workers have. It is not how long you live, but how livable those years are. While we all suggest that simply working longer is the best retirement solution, it skirts the real issue of whether they want to or if they can. I'm guessing that only a small percentage will or could work past even the full retirement age. Some may have to. But if the amount of people opting for early benefits is any indication, they want to make sure of some things (getting the benefit) and worry about others as they age (whether they can or should work).