The Truth Behind Raising the Social Security Retirement Age
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.
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.
SSA Mortality Tables
This framing has real costs to workers with hard jobs.