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The Truth Behind Raising the Social Security Retirement Age

February 7, 2013

Recently there has been some talk of raising the Social Security retirement age from 66 to 70 or thereabouts. On the surface, such debates focus around how long the government thinks you should be working or other such nonsense. But that whole discussion is a smokescreen. The fact of the matter is that the Social Security Administration does not have enough money to pay the benefits promised, and someone needs to get reduced benefits or the payments will simply stop one day. Past generations took more out than they paid in, often by quite a lot. Now the jig is up. The SSA either has to make smaller payments or fewer payments.

A payment at age 65 is worth a lot more than a payment at age 70 because more people will still be around to collect it. Furthermore, a payment delayed 5 years is worth less because the SSA has more time to invest and earn a return on the money. Finally, a later retirement age means more years that workers pay into the system. Salaries tend to increase with age, so the last 4 years of earnings are potentially the highest level of taxes a worker will ever pay.

Value of Retirement Benefits from Various Ages
Value of retirement Benefits
Based on an annuity deferred from age 60, using the 2012 effective interest rate and this mortality table.

At age 67, an annual annuity is worth approximately 7.8 times the value of a single “lump sum” payment. At age 70, an annuity is only worth about 5.9 times the value of a single payment. That means that an annuity starting at age 70 is only worth 75% of what an annuity at age 67 is worth and only 63% of what an annuity at age 65 is worth. If politicians said we’re going to cut 25% off the promised amount of payments, there would be an uproar. However, framing the cut as an increase in the retirement age has avoided that flak, but amounts to the same thing in terms of overall value.

Ideally, public discussion would simply consist of determining how big of a haircut to give retirees and how quickly to phase it in. Changing the retirement age is a gimmick which relies on the fact that most people don’t realize that most of the value of their retirement payments come from the first few years. Unfortunately, I think that would require a level of maturity that simply isn’t there in public debates. The government shouldn’t care one bit when people retire. It should be up to the individual when they need the money. Early retirement should obviously receive smaller payments, but framing a benefit cut as a retirement age increase is deceitful and relies on public ignorance.

Further Reading/Sources
SSA Mortality Tables
This framing has real costs to workers with hard jobs.

2 Comments leave one →
  1. February 8, 2013 12:36 pm

    Most people who argue for keeping SS say that we need it to prevent people from falling into abject poverty in old age, so I think that we should attempt to move toward every person over 65 receiving the same amount of money from SS. Currently many people on SS get only $600/month but the average person gets close to $1,200/month. You could save a lot of money and help the needy by giving everyone $700 or $800/month. You could get there (in real inflation adjusted dollars) by eliminating cost of living increases for everyone receiving over $700 or $800/month.

    Also, I used to worry about blue collar workers needing to retire earlier due their work being physically demanding until I saw some research that showed that the younger blue collar worker retire the young die. (and BTW they did try to avoid a spurious finding due to problem of people retiring early due to bad health). I no longer worry about the blue collar workers needing to retire earlier.

    • February 8, 2013 1:56 pm

      I would be quite happy with moving toward a more explicitly welfare-based payment system. I agree that there really is no reason for someone to get $1200+ from the SSA. If your income was high enough to get that kind of payment, it’s high enough that you could save your own darn money for retirement.
      On the second argument, I don’t agree. If the SSA used industry specific mortality tables when adjusting for early retirement, I think you’d have a good case, but I don’t think they do. Workers in blue collar industries are getting an even worse deal because they work a similar amount of time and then die, rather than getting a long stream of payment. I can’t imagine that the study prefectly accounted for all the other variables. It seems a little paternalistic to tell some guy with arthritis building houses for $10 an hour that he’s got to work into his 60s because then he’ll live longer.

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