Video from C-SPAN appearance on Social Security

I was on C-SPAN's Washington Journal this morning to discuss Social Security, with a focus on proposals to raise the early retirement age of 62. Plus phone calls, which are always the best part.


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Video: Talkiing retirement age on Fox

This is a few weeks old but I just was sent the video today.

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What Americans think about raising the Social Security retirement age to 70 (Courtesy of The Onion)

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Video from recent AEI conference, "Keeping Granny On the Job."

I've managed to embed video of the recent AEI event at which Estelle James and I discussed incentives to delay retirement in the U.S. and Chile. Take a look.

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Should you claim Social Security benefits earlier if your life expectancy is shorter than average? I don't think so.

U.S. News & World Report's Emily Brandon discusses a number of different Social Security claiming strategies. Check out the details here. It's a good summary of the current literature on claiming strategies, which is developing rapidly.

But here's one place I don't entirely agree with Emily. Here's the passage, in which I'm quoted:

Benefit checks increase by about 7 to 8 percent for each year you delay claiming up until age 70. Retirees who sign up at younger ages get smaller payments over a longer period of time, while those who wait get larger checks for their remaining years. "I would argue they would be better off claiming later because then they get a higher benefit and because you are getting more insurance against outliving your assets because Social Security benefits last as long as you live," says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration. Of course, if you have a reason to believe you won't live a long life, it's best to sign up right away.

It's the last line, which I've italicized, that I question.

Let's say you're part of a group with known lower-than-average life expectancies – say, African American males. You know that while a typical 65 year old might live to age 83, an African American male on average lives to only 80. On average, then, you'll collect benefits for fewer years. But here's the key: you still have a lot of uncertainty regarding how long you'll live and a higher Social Security benefit protects you against that uncertainty. The chart below, which I put together from life tables from the National Center for Health Statistics, shows that average life expectancies have only limited value; the range of outcomes also matters a lot, but people don't think very much about them. For instance, a 65-year old black male has around a 10 percent chance of living beyond age 92 – for those individuals, a higher Social Security benefit would be of great value in holding off poverty in old age. Moreover, given standard economic assumptions regarding the utility of money, such that you'd be willing to give up some income today to prevent even a small chance of falling into poverty in old age, the case for even black males – the stereotypical low life expectancy group – to delay claiming Social Security benefits looks stronger.

The broader point is that the choice you make shouldn't be premised on your life expectancy versus the average; what does it matter how long other people live? What matters is your own life expectancy and the degree of uncertainty surrounding that point estimate. The more uncertain your life expectancy is, regardless of the average value, the more a higher annuity payment will benefit you.

Another issue to consider is benefits for your surviving spouse: even if you know you'll die young, by delaying benefits you guarantee a higher income for your spouse later in life. These issues are a lot more complex than some of the usual claiming strategies portray. People shouldn't think of choosing their claiming age as a game in which they hope to survive to some "break even age" and then "make money" afterwards. Choosing your claiming age is about making sure you have money when you need it the most.

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New paper: “Does It Pay to Work? The Case for Cutting the Social Security Tax for Workers near Retirement”

I have a new Retirement Policy Outlook released by AEI today. The paper, "Does It Pay to Work? The Case for Cutting the Social Security Tax for Workers near Retirement," focuses on the marginal returns paid by Social Security to workers near retirement. The marginal return is the additional benefits earned for an additional dollar of taxes paid, and is a key incentive affecting decisions to continue working or leave the workforce and retire. Here the opening:

Social Security's 12.4 percent tax is the largest paid by most workers and Social Security benefits are the largest income source for most retirees. An individual considering whether to work or retire might ask, "What's in it for me? If I continue to pay into Social Security, how much additional benefit will I receive?" The answer: not much. The typical individual who works for an additional year before retiring will receive only 2.5 cents in additional benefits for each dollar of extra taxes paid to Social Security. This translates to a marginal rate of return of -49.5 percent. One reform to extend working years and enhance income security in retirement would be to reduce or eliminate the payroll tax for individuals above a given age.

Marginal returns are low for men because the Social Security benefit formula counts only their highest 35 years of earnings in calculating benefits; if an additional year of work isn't in the highest 35 – part time work comes to mind – then no additional benefits are received. Marginal returns tend to be low for women due to the presence of spousal benefits, under which a lower-earning spouse receives the higher of her own benefit or half her spouse's benefit. Women who receive auxiliary benefits, as most do, will in general face a -100 percent marginal return for additional taxes paid.

The argument here is that if we want older Americans to remain in the workforce, we need to give them an incentive to do so. The current Social Security benefit formula pays very little extra benefits to people who choose to work longer, which weakens incentives to delay retirement. While a number of different policies could improve marginal returns, I focused here on reducing the payroll tax for older workers. It's an easily understandable way to improve incentives to work and I think is worth considering as part of larger reforms.

This Retirement Policy Outlook is drawn from a longer paper co-authored with David Weaver and Gayle Reznick of the Social Security Administration, which was released by SSA earlier this week. That paper includes all the RPO's information on marginal returns, as well as analysis of lifetime rates of returns and a third measure we call incremental returns. The incremental return looks at the benefits a married person could receive by working, over and above the spousal benefits they would receive based on their spouse's earnings record. For example, a woman who works might receive only a little bit more benefits based on her own earnings record than she would receive if she had not worked and simply collected a spousal benefit. This structure means that most of the taxes she pays over her lifetime don't generate new benefits for her, and thus serve as a disincentive to work. Married women are generally held to be more responsive to tax rates than unmarried women or men, so it can be counterproductive if married women face the highest net tax rates at the margin.

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Can people delay Social Security retirement? In the past, they did.

One of the most prominent reforms for Social Security is to increase the retirement age, which would require people to work longer to get the same level of benefits they do today. For instance, until 2000 the full retirement age was 65, since then it's moved to 66, and by the early 2020s it will increase further to 67. In a way this makes sense, both since Social Security is insolvent and since people are living longer.

One counterargument for raising the retirement age is that people can't work longer, due to health reasons or the types of jobs available in the economy. While there's no way to prove this one way or the other, there's one interesting piece of evidence that most people don't about: in the past, most people delayed claiming Social Security far longer than people do today.

The chart below is drawn from SSA data (available here). It shows that in 2005 the average age at which people claimed retirement benefits was around 63.7 year. The most common age of claiming is 62, but some people claim later. However, the chart also shows that in the past, most people waited several years longer to claim benefits. In the 1950s, for instance, the typical person did not claim benefits until age 68. The reasons for this are primarily that you could not collect retirement benefits at all until age 65 and that there was a stricter retirement earnings test that limited or eliminated benefits for retirees who continued to work.

But the point is that the 1950s were in many ways a harder time for someone to delay retirement. Life expectancies and health were worse than today. The typical 65 year old in 1955 could expect to live around 14.9 extra years, while today a typical 65 year old can expect to live an additional 18.8 years. Moreover, jobs in the 1950s were far more physically demanding than those today – think steel mills, mines, and so forth.

While the fact that people in the 1950s delayed retirement is no guarantee that Americans today can, it's certainly evidence in that direction.

P.S. Note the steep decline in claiming ages beginning in the mid-1950s for women and early 1960s for men. This was when early retirement at age 62 first became available.

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Ross Perot on Social Security Reform

The New York Times Freakonomics blog has a Q&A feature with Ross Perot where the billionaire budget reform answers reader questions on a number of topics, including Social Security reform.

Q. How do you believe Social Security can be reformed (or abolished, if you believe this) to benefit my generation (I'm 17 years old) as well as the current generation?

A. Plans such as Rep. Paul Ryan's (R.-Wis.) "Roadmap for America's Future" contain several ideas for reforming Social Security that deserve serious consideration. The challenge is to preserve the benefits for retired citizens and those nearing retirement age, say 55 and older, while strengthening the retirement benefits for the remaining workers. This would include ensuring the solvency of the Social Security system with changes to the retirement age.

Contrary to conventional wisdom, the current financial crisis offers the perfect time to face this problem. The record deficit spending that has already been approved is sure to place enormous burdens on our children and grandchildren for years to come. Taking steps now to solve the Social Security dilemma (as well as the more pressing problems posed by Medicare and Medicaid) will help to bring clarity to the long-term outlook for our nation's financial future.

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New paper: Adjusting Government Policies for Age Inflation

The NBER has released a new working paper by John Shoven of Stanford and Gopi Shah Goda of Harvard entitled Adjusting Government Policies for Age Inflation. Here' the abstract, followed by a link:

Government policies that are based on age do not adjust to the fact that a given age is associated with a higher remaining life expectancy and lower mortality risk relative to earlier time periods due to improvements in mortality. We examine four possible methods for adjusting the eligibility ages for Social Security, Medicare, and Individual Retirement Accounts to determine what eligibility ages would be today and in 2050 if adjustments for mortality improvement were taken into account. We find that historical adjustment of eligibility ages for age inflation would have increased ages of eligibility by approximately 0.15 years annually. Failure to adjust for mortality improvement implies the percent of the population eligible to receive full Social Security benefits and Medicare will increase substantially relative to the share eligible under a policy of age adjustment.

http://papers.nber.org/papers/W14231

Update: The Wall Street Journal has a story on this paper.

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New paper: A guide to starting Social Security benefits

Richard L. Kaplan of the University of Illinois College of Law has a new paper in the Journal of Retirement Planning, July-August, 2008 entitled "A Guide to Starting Social Security Benefits," which focuses on the decisions facing an individual who is considering claiming retirement benefits. It's a good paper overall, but (like many articles on Social Security written by law professors) it has a great deal of detail but could benefit from greater context.

For instance, Kaplan correctly points out that the Social Security formula is neutral with regard to claiming age, meaning that the average person will collect just about the same amount (in present value) regardless of when he claims. But the decision is framed in terms of a "gamble" over whether an individual who delays claiming will live long enough to break even:

Early benefits are smaller in amount, but will be received for more years, all things being equal, while delayed benefits are larger in amount, but will be received for fewer years, once again all things being equal. The question then becomes what the person estimates will be his or her life expectancy. To put this issue in the starkest terms, getting less now in exchange for more later makes sense only if there is, in fact, a "later." Thus, the question inevitably turns at the outset on such factors as one's personal medical history, including that of one's natural parents, if known.

An alternate, and equally correct, framing devise is to view the Social Security benefit as insurance against outliving your assets. Even people who believe they will live less shorter than the average nevertheless have significant uncertainty regarding their actual age of death. By delaying claiming, you are effectively "buying" more insurance against longevity risk. Put in these terms, more individuals may choose to delay claiming past 62 or 63, the most common ages for Americans to retire.

Likewise, while Kaplan does not describe the retirement earnings test incorrectly, it is framed as an onerous "tax" that most people would seek to avoid:

Any Social Security recipient who has not yet attained the applicable full retirement age faces onerous retirement earnings test that substantially reduces the economic rewards from working. This provision has the same economic impact as a 50 percent marginal tax rate on the affected earnings. Those earnings, moreover, are subject to a federal income tax on income generally of at least 15 percent in addition to Social Security's effective 15.3 percent payroll tax on wages and self-employment income, a combined effective marginal tax rate of over 80 percent and possibly even more, depending upon a retiree's other sources of income. In fact, additional income of $19,940 in 2008 would push this taxpayer into the 25 percent federal income tax bracket, raising that person's effective marginal tax rate to 90.3 percent.27 State income taxes would raise this effective marginal tax rate still higher.

The problem is that the earnings test doesn't have "the same economic impact as a 50 percent marginal tax rate on the affected earnings." If benefits are increased at the normal retirement age to account for the earnings test (as I discuss in this paper), then the earnings test is no more a tax than is, say, the automatic deduction of contributions to a 401(k) plan. Yet if this isn't made clear, the typical person will misunderstand the provision and potentially mis-react to it.

All that said, an interesting paper and a good resource for someone looking to understand the questions a potential claimant should consider.

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Academy of actuaries: Raise the retirement age

On Monday the Academy of Actuaries will hold a press conference at the National Press Club to release a new paper on Social Security reform. The sneak preview, via the Associated Press's Jesse J. Holland, is that the actuaries favor raising the retirement age as part of a larger Social Security deal.

Want to keep Social Security from going bankrupt? Make future recipients wait longer for their first benefit check because they probably will live longer anyway, an influential group of actuaries says.

The next president and a new Congress will come under increasing pressure to act to fix the Social Security system. Democratic presidential candidate Barack Obama rejects any increase in the retirement age while his GOP rival John McCain opposes tax increases as a possible fix.

The American Academy of Actuaries, which advises policymakers on risk and financial security issues, wants any potential solution the White House and lawmakers might consider to include raising the retirement age from the current range of 65-to-67-years-old. The group provided The Associated Press with an advance look Thursday of its recommendations.

Current benefits are supplied by payroll taxes from today's workers, all of whom pay a 6.2 percent Social Security payroll tax on income up to $102,000. Their employers match it, for a total tax of 12.4 percent. The tax applies only to earned income, not to passive income such as dividends and interest.

Benefits are projected to exceed the Social Security system's tax revenues in about nine years. The program's trustees have said the Social Security trust fund will be depleted by 2041 without changes.

A major problem, the actuaries say, is that people are living longer. That means they are drawing more money from the program.

When Social Security started in 1935, the average American's life expectancy was just under 60 years, according to the Social Security Administration. By comparison, people now eligible for Social Security can expect to live on average a little past 76, the agency says, "meaning workers have more time for retirement and more time to collect Social Security."

For many years, 65 has been the retirement age to receive full benefits. But under changes in 1983, only people born before Jan. 2, 1938, can collect full benefits at 65. Those born after that date face a gradually rising retirement age for full benefits until it reaches 67.

Current estimates show that by 2040, 65-year-old men and women could live at least 18 more years after becoming eligible for full Social Security benefits.

"You just can't have people living longer and longer and longer, and have the program with a frozen normal retirement age of 67. It just doesn't make sense," said Bruce Schobel, the chairman of an academy task force on retirement security principles. "Eventually people will have a larger and larger proportion of their lives spent in retirement until you reach the point where we just can't afford it."

The academy is not staking out a position on when people should retire and acknowledges that saving Social Security will take more than just raising the retirement age.

"All that we're suggesting is that some increase in the retirement age should be part of any package," Schobel said.

Obama already has rejected such advice. "We will not raise the retirement age," Obama said in June at a campaign event in North Carolina.

Obama has, however, called for a Social Security payroll tax on incomes above $250,000 a year, compared with the current $102,000 threshold.

"Barack Obama is opposed to raising the retirement age. He believes we should strengthen Social Security while protecting the middle-class families that rely on it," said Jason Furman, Obama's campaign economic policy director. "To that end, he would like to work with Congress on a plan to ensure that people making over $250,000 pay a little more to strengthen this vital program for generations to come."

McCain originally said everything was on the table to fix Social Security. He recently has amended that position, saying he would not increase payroll taxes. "I want to look you in the eye: I will not raise taxes or support a tax increase," he told supporters Wednesday.

Former Texas Sen. Phil Gramm, who served as a McCain adviser until he resigned earlier this month, told The Washington Times this month that a bipartisan deal to save Social Security might include raising the retirement age to 70 over 30 years.

Sens. McCain and Obama are both in a bit of a fix here, although Obama worse than McCain. McCain can reject tax increases and still more or less fix Social Security, say through a combination of raising the retirement age and progressive benefit reductions for high earning retirees. (If you let the NRA rise to 70 by 2080 or so, you could do a benefit reduction that shielded the bottom half the earnings distribution from cuts.) The prospects for political success may be limited, but he can at least put together a plan that's plausible as policy.

Obama's in a bit deeper: his plan to hit earners making over $250,000 would fix maybe 15 percent of the long-term deficit, and he's rejected raising the retirement age or cutting benefits. Where does the other 85 percent (much less the additional fixes needed to make the system sustainable beyond 75 years ) come from? If someone has an idea how they plan on making this work, please let me know.

Update: Reader AK questioned whether raising the retirement age would be regressive, given the shorter life expectancies of low earners. The Excel file below shows that raising the normal retirement age wouldn't be regressive, since it would reduce everyone's benefits by the same amount. Raising the early eligibility age -- 62 -- would be regressive and cause larger percentage cuts for low earners.
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New SSA publication: “When To Start Receiving Retirement Benefits”

Social Security has a new two-page pamphlet designed to help individuals decide when to claim retirement benefits. It's a big improvement from previous publications and provides a lot of useful information in a very short space. Read for yourself, give to a friend. (Full disclosure: while at SSA I was involved with designing the pamphlet, though it has changed somewhat since I left the agency. I do think it's great, though.)

The key points, as I see them:

• Choosing your retirement age isn't about maximizing your lifetime benefits – for the typical person, these are the same regardless of when you claim – but ensuring you'll have enough income later in life.
  
• Social Security benefits last as long as you live, and so are valuable insurance against outliving your assets. While the average 65 year old lives to age 83, about 25 percent will survive to at least age 90 and 10 percent will live past age 95.
  
• Delaying claiming doesn't just increase your benefit, it also raises benefits for your survivors. A simple "break-even age" approach doesn't factor in survivors benefits.
  
• The earnings test isn't a tax; while you may lose some benefits before the full retirement age, you'll receive an increase afterwards to make up for them.
  

Kudos to the SSA staff who put this together. You can download the pamphlet here.

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Would raising the retirement age be regressive?

It's sometimes commented that increasing the Social Security retirement age would be regressive. This makes sense at first glance, since lower earners tend to have shorter life spans that higher earners. However, an increase in the normal retirement age is equivalent to an across the board benefit cut – for each year the retirement age rises, benefits are reduced by around 6.7 percent. So there's no particular reason to think raising the retirement age would be any more regressive than any other benefit cut.

However, to check it out further I did a quick run using the Gemini model, where I compared replacement rates (annual benefit divided by an annualized income derived from the present value of lifetime earnings) by lifetime earnings percentile. I calculated replacement rates for current law and for a policy that would eliminate the hiatus in the retirement age increase from 66 to 67, and further raise the retirement age to 70 by the year 2060. (Although I examined the policy for the 1960 birth cohort, meaning their retirement age would not have risen all the way to 70 by the time they retired.)

The figure below compares replacement rates by earnings percentile for current law and an increased retirement age.

While this isn't decisive, visually there doesn't appear to be any strong deviation by earnings level. (Bear in mind that while the sample population was over 47,000, when examined by individual earnings percentile sample sizes were smaller.) There are other ways to calculate things, but at this point this seems to confirm my prior belief that progressivity wouldn't change very much.

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New book: “Working Longer: The Solution to the Retirement Income Challenge”

Alicia Munnell and Steven Sass of the Center for Retirement Research at Boston College have a new book, Working Longer: The Solution to the Retirement Income Challenge. Here's a short summary of the topics covered:

Why Do We Need to Work Longer?

• Americans need to work longer due to a contracting retirement income system, longer lifespans, and rising health care costs.

• Working longer does not mean working forever — the goal should be to move the average retirement age from 63 to 66.

• Working longer improves retirement security by: 1) boosting monthly Social Security benefits; 2) allowing workers to build up larger 401(k) balances; and 3) reducing the period over which households must rely on their retirement assets.

Will We Be Able to Work Longer?

• Most people will be healthy enough to work until at least 66.

Will We Want to Work Longer?

• Reasons for Hope: For men, the century-long decline in their labor force participation has halted and even begun to reverse. For women, labor force patterns have been converging toward those of men.

• Reasons for Caution: The ability to claim Social Security benefits at age 62 is a powerful inducement to retire. Also greater job turnover makes employment more difficult for workers in their fifties.

Will Employers Want to Employ Us?

• Reasons for Hope: Employers value older workers' productivity and reliability. And some industries could experience labor shortages as the population ages.

• Reasons for Caution: Employers are concerned about older workers' wage and health care costs and question their ability and desire to keep their skills current. Also, many employers can tap a global labor market to replace older workers.

How Can We Encourage Longer Work Lives?

• Workers: Make a plan to keep working and stick to it.

• Employers: Redesign production and personnel systems to fit older workers.

• Federal government: Raise Social Security's Earliest Eligibility Age.

• State government: Develop job skills and job matching programs.

Also, click here for a list of myths regarding retirement that Munnell and Sass discuss, and click here to order a copy.

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New paper: “The Social Security Earnings Test: The Tax That Wasn’t”

In the interests of self-promotion, I have a new paper in the AEI Tax Policy Outlook series that focuses on the Social Security earnings test. Here's the short story:

Most seniors view the Social Security earnings test as a "tax" that reduces their Social Security benefits by fifty cents for each dollar they earn above a modest limit. In fact, the earnings test is not a tax at all: at a person's full retirement age, Social Security increases benefits to account for any lost to the earnings test in earlier years. Over the typical retiree's lifetime, total benefits are almost exactly the same. Most retirees are unaware of this because the Social Security Administration (SSA) and financial advisers fail to inform them of how the earnings test works. Retirees need better information--and policymakers should consider whether the earnings test makes sense at all.

The basic story is that the earnings test has all the bad parts of a tax – distortion choices, limiting earnings, pushing people out of the workforce – without the good part, raising any revenue. People think of the earnings test as a tax because they're not told that at the full retirement age SSA adjusts their benefits to account for any months of benefits lost to the earnings test. At the least, we need to better inform the public; we should also think about whether the earnings test really makes sense going forward, given how hard it is to educate people about it.

The full text is available here.

UPDATE: For those interested in how the repeal of the earnings test for individuals over the full retirement age has played out, I should have also cited this paper by Joyce Manchester (CBO) and Jae Song (SSA).

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New paper: EBRI 2008 Recent Retirees Survey: Report of Findings

The Employee Benefit Research Institute released a new paper by Ruth Helman, Craig Copeland, Jack Vanderhei, and Dallas Salisbury which focuses on why employees chose to retire and what employers can do to keep them. Here's the summary:

This paper presents findings from the 2008 Recent Retirees Survey, sponsored by the Employee Benefit Research Institute (EBRI) to better understand the tools and practices that might encourage workers to postpone their retirement and remain longer with their company. It finds that retirees typically retired from employers for one of four reasons: retirement becomes affordable, lack of job satisfaction, a desire for more personal or family time, and/or their own health status. One of the major findings from the survey is that employers have a narrow window of up to two years in which they may be able to intervene to change retiring workers' decisions by offering them incentives to remain with the company. Although no single incentive is likely to motivate a majority of retirees to stay longer with their employer, it appears that employers may be able to assemble a toolkit of alternatives that would be effective in retaining substantial numbers of workers at retirement age. The survey tested a total of 19 possible incentives that might encourage retiring workers to postpone retirement. The most likely incentives to be successful are: (1) feeling truly needed for an assignment; (2) allowing the worker to receive a full pension while working part time; (3) a pay increase; (4) continuing to receive company subsidized health insurance benefits at the same level as full-time workers while working part time; (5) allowing the worker to receive a partial pension while working part time so that total income remains the same; (6) being able to work seasonally or on a contract basis.

The full paper is available through the Social Science Research Network.

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Obama discusses Social Security reform

Here's Barack Obama in Gresham, Oregon discussing Social Security reform, both his own ideas and criticism of Sen. McCain:



Obama says that a first priority is to stop spending the Social Security surplus, which implies balancing the non-Social Security "on-budget."

Second, he opposes any changes such as increasing the normal retirement age or reducing annual cost of living increases, because he believes his own plan -- eliminating the payroll tax ceiling, with a "donut hole" between the current ceiling of $102,000 and around $250,000 -- will be sufficient.

Obama proposes eliminating income taxes on Social Security benefits for individuals earning less than $50,000 in retirement. Obama says this will benefit around 7 million people, at an average of $1,400 per person. As this income tax revenue currently flows to Social Security, this will reduce the program's solvency. (While I don't know the source of his numbers, taking him at his word this would cost around $9.8 billion annually -- a lot of money, though relatively small on Social Security's scale.)

Obama also discusses his plan to automatically enroll individuals in workplace defined contribution pension plans. This is a very good idea, with bipartisan support. (See this proposal from the Retirement Security Project at the Brookings Institution.)

Update: A friend emails: "I guess Obama is unconcerned about generational equity. He wants to reduce taxes on people already getting the best deal (current retirees) and increase them on the generations already getting the worst deal (current workers)."

Me: Hard to deny that's the net result Sen. Obama's policies. To a large degree, Social Security is all about spreading cost burdens over time; making Social Security an even better deal for current retirees will require larger tax increases or benefit reductions on future participants. It's not clear why that's justified on either a policy or a moral basis, though electorally it's got an obvious appeal. Read more!

New paper: Have People Delayed Claiming Retirement Benefits?

CBO released a working paper (available here) by two of my very talented former SSA colleagues, Jae Song of Social Security's Office of Retirement and Disability Policy and Joyce Manchester, now of the Congressional Budget Office.

Here's the abstract:

Two changes have been made recently to rules governing the Social Security program: the retirement earnings test was eliminated in 2000 for people aged 65–69, and the full retirement age (FRA) for people born in 1938 or later was scheduled to gradually increase in two-month increments until reaching age 67. This paper examines changes in the age at which people claim Social Security retirement benefits in response to those changes. Data come from a 1 percent sample of administrative data from the Social Security Administration for 1997 to 2007.

Descriptive and regression analyses show that the largest effect of eliminating the earnings test in 2000 occurs at age 65. At that age, the proportion of people who claim retirement benefits increases by 4.6 percentage points among men and 2.4 percentage points among women. In addition, eliminating the earnings test significantly increases—by more than 20 percent—the benefit entitlement hazard for those turning the FRA (that is, the percentage of people who are newly entitled in a given year among those who are fully insured but were not previously entitled). Moreover, the response to the gradual increase in the FRA occurs not only among those who are close to the FRA but also among those who are close to the early retirement age.

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Met Life Social Security Claiming Age Calculator

Met Life has released an online calculator to help people determine the best age at which to claim Social Security benefits. This is obviously a step in the right direction, given how many people choose to claim at 62, the earliest age at which retirement benefits available. As best I can tell, the underlying approach is taken from SSA's own retirement calculators, though Met Life tweaks it with gender specific life expectancies and a generally snazzier interface (including Snoopy).

In short, the user inputs their age, earnings and gender, and the calculator estimates their benefits and life expectancies at different ages. Users compare claiming benefits at age 62 with claiming at some higher wage (say, the normal retirement age or age 70). The calculator then calculates the break-even age -- the age at which total benefits received are equal between the two claiming ages -- and the probability of the user surviving to the break-even age.

That said, and as much as I'm reluctant to criticize something which attempts to move in the right direction, there are a couple problems with the Met Life calculator.

First, if you're going to do a break-even analysis, total benefits should be calculated as a present value, meaning that the interest value of benefits is included, rather than simply summing benefits received in multiple years. Granted, SSA also simply adds up benefits, but this is wrong; no economist or actuary would do it this way.

Second, the break-even age approach isn't really the best way to choose a retirement age. Choosing your retirement age isn't a game in which you try to maximize lifetime benefits. Rather, you should retire at an age that provides you with an adequate income. Imagine, for instance, that you could maximize your lifetime Social Security benefits by claiming at age 62, but that your benefit at 62 would be below the poverty line. Would it make sense to claim then, or delay a few years to receive a higher benefit? Common sense says to delay, if you are able, but the considerations of benefit adequacy aren't accounted for in break-even exercises.

Third, the calculator doesn't take into account the annuity value of Social Security benefits. Retirement benefits are paid as an annuity, meaning that they last as long as you live. Annuities are very valuable compared to lump sums since they insure against the chance of outliving your assets. (So much so that even groups with below-average life expectancies, like black males, benefit from the Social Security annuity. See here.) By delaying claiming benefits, you're essentially "buying" more of the Social Security annuity. The insurance value of an annuity is hard to represent in an online tool, but it's worth bearing in mind research showing that a retiree would need a lump sum of around $150,000 to provide the same lifetime income security as an actuarially fair annuity with a premium of $100,000.

Fourth, the calculator doesn't tell the full story on the Social Security earnings test. It does note that early retirees with earnings above $13,560 will have their benefits reduced on a $1-for-$2 basis. What it doesn't tell is that at the full retirement age, Social Security not only stops reducing your benefits, but actually increases them to make up for benefits lost to the earnings test in earlier years. Over the course of a full retirement, total benefits are around the same. So the earnings test shouldn't discourage people from working while collecting benefits.

Overall, the Met Life calculator is a welcome addition to financial planning tools, particularly since it's designed to be easy to use. However, with improvements it could be significantly better.

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Mark Thoma on John Shoven and raising the retirement age

Stanford economist John Shoven argues for increasing the Social Security retirement age, based on a novel redefinition of the term “age”: for Shoven, age should be measured in terms of years from death rather than years from birth. The Social Security retirement age should rise in years-from-birth terms, Shoven says, given that years from death are increasing as mortality declines. Shoven says:

Just consider the consequences of altering the age when entitlement benefits kick in or retirement becomes mandatory to these new inflation-adjusted measurements. It doesn't mean shortening retirements, just stabilizing them. In 20th-century America, the average length of retirement grew from two years to more than 19 years. As life expectancies continue to rise, retirements will continue to get longer -- and the pension bill far larger. If benefits and retirements are governed by mortality risk instead of age, the costs will be far more manageable. We've witnessed dramatic improvements in life expectancies over the past century. It's time we dramatically improve the way we measure age as well.

Mark Thoma disagrees. First, he says:

there is no guarantee that the ability to work and lead a productive life expands at the same rate as life expectancy (e.g., if most of the extension in life expectancy in the future comes from expensive interventions toward the end of life rather than improvements in health during, say, the late 60s, that make working easier then there would be no reason to extend the retirement age). It would be better to define retirement in terms of the minimum of these two concepts, the time at which the typical person can no longer be expected to work full-time on a typical job that may have physical demands, and the life expectancy adjusted retirement age discussed above.

Of course, there are no “guarantees” that the ability to work rises commensurately with expected age of death, but this seems a remarkably high standard of evidence to demand. The evidence seems to indicate that health status is improving with longevity – that is, we are not simply surviving a few more years in decrepitude but the process of aging is in fact moving more slowly.

For instance, John Turner examines health status by age and ethnicity among individuals aged 50 to 64. In all categories, the percentage of individuals reporting fair or poor health status has declined significantly since 1982.

The percentage of individuals with physically demanding jobs has also declined: from 1950 to 1992, the percentage of individuals reporting jobs requiring frequent lifting of heavy objects has fallen by from 20 to 8 percent. Turner concludes that “it appears clear that if demand for older workers were sufficient, it would be feasible to raise the Early Eligibility Age for Social Security to 63.5 in order to promote longer worklives.”

Thoma’s second objection to Shoven’s argument is “that Social Security is not the entitlement problem we should worry about, that title belongs to Medicare where costs are expected to increase rapidly in the future.”

This argument is flawed, for two reasons. First, simply because one problem is larger than another does not mean that we address only the largest one. Social Security is the largest program of the federal government and its costs are projected to rise by over 20% relative to its tax base in the next 10 years, with further increases in following decades. Given that reform is essentially a problem of smoothing cost burdens over different cohorts, it’s not clear how delaying action makes for a better outcome.

Second, Social Security is a more mature policy issue than health care. We know fairly precisely what the cost drivers are for Social Security, while for health care the components of excess cost growth are less clear cut. Moreover, for Social Security we know the range of options fairly well, making a potential compromise easier to envision. On the health care side it’s not well understood even the degree to which we should want to restrain cost growth, much less the most efficient ways to do so.

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