Tuesday, June 7, 2011

Bloomberg Editors: How to Fix Social Security

Raise the retirement age, increase the wage cap, and reduce COLAs. Check it out here.


JoeTheEconomist said...

Raising retirement age. Currently 73% of workers retire before full retirement age. As you raise full retirement age, you create an incentive for people to retire earlier. How does that fix Social Security?

Andrew G. Biggs said...

I'm not sure I follow the argument. I think most people would a) work longer (or save more) to make up for the lost benefits; and b) work longer due to the signaling effect of the higher retirement age. Some more people might claim DI, since that way they wouldn't be affected by the higher NRA, but that's a somewhat different story.

JoeTheEconomist said...

These are rough numbers from my SS account statement that I looked at 2 years ago. If I retire at 62 I get X. If I retire at 67 I get X + 300 some dollars. I have to live to 79 to breakeven. Now if I have to work to 69, my breakeven is much higher say mid 80s.

I am not working 5 more years when my breakeven is 85 or so. I am going to retire at 62 and be done with it. Is my math bad?

I heard something like 73% of Americans retire before full retirement. So does raising the retirement age really matter?


Andrew G. Biggs said...

Raising the retirement age basically just means that benefits are cut (by around 7% for each year the retirement age is increased). Most people will respond to a benefit cut by working long, so that's the logic on how raising the NRA will cause people to delay retirement. Also, many people target the NRA as the 'right' age to retire; as it shifted form 65 to 66, more people delayed claiming. No guarantees, but my bet is that people would work longer if the NRA is raised more.

JoeTheEconomist said...

You know these studies better than I do. Is it assumed that people will work longer if the system raises the retirement age? That conclusion is hard for me to believe because of the data points in my life.

My mother in law retired at 62 because her company told her it was financially the best thing for her. She is the last person on earth that SS would want to leave the workforce. At her compensation - she is a net contributor to the system now she is helping drain the system.

Last year, 73% of Americans who claimed Social Security did so before full retirement.

In my case, raising the retirement age by a year simply makes early retirement more sensible. The breakeven increases from 80.5 to 83 or 84 given a 7% drop in my benefits. I am not sure what most people would do, but higher compensation people are apt to take the package early unless they simply enjoy work.

People may work longer, but it would seem to me to be statistically biased to lower wage workers who haven't saved for retirement. I don't know that they are the solution.