Social Security Update
When Social
Security was
first instituted in 1935, the retirement age was set at 65. Some cynics
have
argued that 65 was
chosen as the age at which benefits would begin because life expectancy in 1935 was only 61.7.
But life expectancy
at
birth took into account the high rate of infant mortality
in the early 20th century.
In 1935, men who made it to age 65 could look forward
to
another 13 years, women another
15
years, on average.
The German retirement system, which preceded ours, initially set 70 as
the
retirement age; later
it was lowered to 65. By 1935, the Committee on Economic
Security (CES)
proposed age 65 as
the retirement age under Social
Security,
partly because many public
and private pension systems
were
using it, and partly
because it would produce an actuarially sound system that would require only modest levels of payroll taxation.
In the 1950s
and 1960s, first women, and then men, were
allowed to start benefits
at
62. An adjustment was made in the benefit amount to account for the fact that early claimers would receive benefits over a longer period of time.
In the early 1970s Congress introduced the delayed retirement credit (DRC), which increased monthly benefits for those who claimed after the full retirement age of 65. This credit was phased in over a long period of time and now raises the benefit by 8% per year between full retirement age—now 66—and age 70. At this point it is actuarially fair—that is, for a person with average life expectancy, there is no difference between claiming at 62 and claiming at 70.
In her
brief, "Social Security's Real Retirement Age Is 70,"
Alicia Munnell asks, "Is 70 the 'right' age?"
If 65 was
the right age in 1940, what is the right age today, given the increase in life expectancy? By 2015, life expectancy for 65-year-old
men
will be 19.3 years
and
for women 21.6 years, an increase of nearly 7 years.
If it is assumed that these gains in life expectancy will be divided between work and leisure in the same proportion as the rest of a person's life, it would point to a "right" retirement age of 70.
But does an age-70 retirement feel
right for most people? Current work
patterns suggest that it is
starting to. Currently about 30% of men are employed at age 70. This percentage has risen substantially since 1985 due to several factors. These include the shift in employer
pensions to defined contribution plans
(defined
benefit plans
encourage retirement age 65), workers'
rising educational levels, improved health, the trend toward less
physically demanding jobs, the decline of
retiree health insurance, and the desire to stay actively involved in the workforce. These factors could continue to raise the retirement age.
On the other hand, declining health or a changing economy might suggest a
lower
retirement age for
some
people. The Employee Benefit Research
Institute, found that 47% of workers
retired sooner than they expected to. Of these, 55%
did
so for negative reasons, such as
health problems or a disability.
Interestingly,69% of workers said they expected to work for pay in retirement, but only 25% actually did so.
Interestingly,69% of workers said they expected to work for pay in retirement, but only 25% actually did so.
But what does "retirement age" really mean, anyway? Is it the age a person transitions from primary career
to a
post-retirement career
such
as consulting or
part-time employment? Is it the age a person quits working for
good? Is
it the age
a person files for Social
Security and/or Medicare? Is
it the age a person stops
saving for retirement and begins drawing down assets to meet current spending needs?
Retirement is starting to look like a process that generally begins in the early 60s and continues into the 70s and even 80s. All along the way decisions must be made about:
Retirement is starting to look like a process that generally begins in the early 60s and continues into the 70s and even 80s. All along the way decisions must be made about:
How and when to leave current employment and what will come next— different employment? No paid employment?—and whether
that might change in the future.
How spending
needs might change—will
there be an increase in spending
for travel and leisure,
or a decline in spending to accommodate a
reduction in income?
What to do about health insurance—65 is
still
the
age for
Medicare, but
people who continue to work
for
larger
employers
(20 or more employees) may stay on the employer plan and delay Medicare until they leave
employment.
When to file for Social Security benefits—this can be done anytime between age 62 and 70 and does not have to coincide with the termination
of
employment.
How to manage the drawdown of retirement assets to generate income over
remaining life expectancy. (Note: average life expectancy should not
be
used for this purpose since half of all people will outlive the average life
expectancy of about 84 for men and 87 for
women. The withdrawal plan
should address
longevity risk, or
the
risk of living to age 95 or 100 or even longer.)
Social Security is
one
of the few sources
of
retirement income that addresses
longevity risk. For
this reason, it pays to maximize Social
Security income in the later
ages, when other sources of income, such as paid employment or retirement account withdrawals,
have either stopped or dwindled down. "Most people do not understand the relationship between claiming age and monthly
benefits," says Munnell in
her brief. "Given that Social Security is
a particularly valuable type of income—inflation adjusted and lasts for
a lifetime—it generally
makes sense for workers to postpone claiming as
long
as possible to get the highest monthly amount, assuming they are
in
good health for
their age."
Although most clients understand the fluidity and drawn-out nature of retirement today, many of them
are still anchored to 62 as the age for
claiming Social
Security benefits. Influenced by their friends, by Social Security solvency scares,
or by the desire to have a little extra income, nearly half of all people start Social
Security sometime before
their full retirement age. They know they'll get more if
they
wait until 70, but they're not convinced it's worth it. 62 still
stands out as
the
age for collecting Social
Security benefits.
What Munnell and other retirement experts are
trying to do is
reset the anchor to
70. What if baby boomers
started thinking of 70 as the normal
retirement age with any age earlier
than that being considered early retirement? Not only
would
they
be assured of receiving the maximum Social Security benefit, they might
also
delay their employment termination date and pump that much more
money into their retirement savings accounts. With life expectancies increasing, they're
going to need it.
The second most common question that comes up (after "Can
I start my spousal
benefit at 62?") is "I started my benefit
at
62 and now regret the decision. Is there anything I can do?" Many baby boomers
start benefits
at
62 because it seems like the thing to do. Then they go to a Social Security seminar or read the
personal finance literature
which overwhelmingly recommends delaying benefits to 70, and the light bulb goes on. It hits them that early claiming will leave them
shortchanged over
their
lifetime and give them lower
income in their
later years.
No comments:
Post a Comment