Friday, June 27, 2008

Top 6 Myths About Social Security Benefits

Rich White at has a nice list of the top 6 myths about Social Security benefits. The whole article is worth reading, but here's the quick list:

  • Myth No.1 - It's usually a good idea to start benefits at age 62, as soon as you become eligible.
  • Myth No.2 - If you don't start benefits early, you must wait X years to "break even."
  • Myth No.3 - If you keep working after you start benefits early, you could permanently lose part or even all of  your benefits.
  • Myth No.4 - If you keep working after full retirement age, you will keep paying FICA into the system but you won't earn any more benefit credits.
  • Myth No.5 - The tax on Social Security benefits isn't enough to worry about.
  • Myth No.6 - Social Security benefits don't really help seniors offset inflation.

A couple quick thoughts on two myths.

I totally agree with Myth 2 that using a "break even" approach to choosing when to retire is the wrong way to think about things. It might be an easy way to make a decision – almost always, people seem to conclude that they're better off claiming benefits ASAP – but ignores the fact that life spans are highly uncertain and delaying claiming gives you a larger annuity payment that is designed explicitly to handle those uncertainties. Don't worry about breaking even, worry about having enough money to get by on when you're old.

Second, I disagree somewhat with Rich's treatment of Myth 4, that if you keep working and paying taxes you won't earn more benefits. He's of course technically correct, in that SSA recalculates your benefits each year and will increase them if new earnings enter in to the benefit formula. But in a paper presented at the APPAM conference last year, David Weaver, Gayle Reznick and I looked into how much most people would receive in extra benefits if they decided to work an extra year. The short story is: not much. The median marginal return for an additional year of work was -17%; another way of putting it is that the typical person would receive back only around 9 cents of benefits for each additional dollar of taxes they paid. This is due to a number of factors, including spousal benefits, the progressive benefit formula, the 35 year limit on earnings included in the benefit formula, etc.

My favorite way of dealing with this would be to reduce or eliminate the payroll tax at a given age, such as 62. This would give a direct incentive for individuals to remain in the workforce, and would do so in an easily understandable way.


Bruce Webb said...

Why early retirement?

People who are lucky enough to get benefits typically at least start with two weeks of vacation a year. In some jobs that ramps up with seniority but in some cases not. Now many people more or less plan their year around their vacation, for them that is the payoff for dragging themselves to work the other fifty weeks of the year.

Which is why it is wrong to look at early retirement simply through a narrow economic lense. For people who work to live and don't live to work early retirement represents some 156 weeks of at least partially paid vacation at a time where typically they can still enjoy it. In that three year period they get roughly double the vacation they received in their whole working careers.

I think that white collar and professional workers often fail to realize that retirement IS the payoff for blue collar workers and that payoff is demoninated in hours and days and not dollars. This is particularly true if like most blue collar workers the second worst workplace crime (after stealing money from the till) is being late, even by seconds. After thirty-five to forty years of living under the tyranny of timeclocks and supervisors who tap their watches if you come in two minutes late simple escape is reward enough.

The guys I hang around with are all early retirees, two from disabilities, one by choice (former machinist at Boeing). To a man they enjoy the fact that their time is their own, constrained only by their medical appointments, if it weren't for those they likely couldn't tell you what day it was.

People who make the implicit assumption that given the choice people would choose extra years of working to a moderate tax increase or who wonder why taking early retirement makes sense given the totality of post retirement living are I think somewhat blind to the day to day realities of working for the Man and his Timeclock.

Andrew G. Biggs said...

Early retirement is great if you can afford it, and one reason Americans began to retire earlier is that they COULD afford it -- the used part of the increase in incomes since World War 2 to enjoy longer retirements rather than a higher level of consumption during their working years. No problem there.

The problem comes when people aren't fully prepared and when they haven't looked ahead to their later years. Remember that by retiring early you're accepting a significantly reduced benefit for the rest of your life, and that life might be very long. By delaying claiming you're effectively buying a larger annuity, which means greater insurance against running out of income if you happen to live to very old age.

Bruce Webb said...

True enough. On the other hand too many people whose ultimate philosophy is imbued by one or another variation of the Protestant Work Ethic simply can't grasp why people would trade dollars for time. For them such things as the French thirty-five hour work week and six weeks of vacation or early retirement at the expense of a higher retirement check seem to rise to the level of a moral fault.

Certainly you can outlive your savings, on the other hand the concept of living modestly in retirement is not obsolete. Give me a library card, relatively high speed internet, space to shelve my library and reasonable prices for pasta, potatoes, tuna, cheese, and beer I'll make out fine. I don't need to dine at the Four Seasons.

Andrew G. Biggs said...

I agree. But note something about your bringing up the French 35 hour work week, which I think raises more general issues of left vs right. The 35 hour work week forbids you from working more than 35 hours, thereby clearly imposing one person's value judgment on another.

I may think that working longer is a good thing for most people, but there's nothing that prevents people from retiring early if they wish to and can afford it. 62 is the earliest claiming age for Social Security, but many people effectively retire before that by relying on private savings. That's fine by me if that's what they want.

Bruce Webb said...

I don't know a lot about French labor law but it would seem very odd to me if it actually barred overtime or placed restrictions on having a second, perhaps entrepreneurial, occupation.

Amazing what a couple of minutes of googling delivers. Short version there is no provision preventing French workers from working more than 35 hours.