Opinion

Social Security: A Modest Suggestion

By BEN BRANCH

The U.S. retirement system is beset with challenges. First, the shift from defined-benefit to defined-contribution plans coupled with low contribution rates and poor investment performance means many will have inadequate resources at retirement. Second, longer life expectancies and declining birth rates are increasing the ratio of retirees to workers. Third, the Social Security trust fund is projected to run dry in about 20 years.

The present system does provide a comfortable retirement for those with generous coverage under the remaining defined-benefit plans as well as for those with large sums in their defined-contribution accounts or elsewhere. Those having modest pre-retirement incomes may, however, have little or nothing built up in their retirement accounts. They must largely look to Social Security, which was not designed to be their sole support.

Moreover, unless something is done about it, the Social Security System will in the future be unable to continue to fully fund its payment obligations.

Suggested approaches include increasing the Social Security tax rate and/or increasing the standard retirement age (very difficult politically). Moreover, a higher standard retirement age would force everyone to defer retirement or accept a lower benefit when many people are physically unable to continue working. And even if something is done to improve the system’s finances, that would not necessarily address the problem facing those who retire with too little put aside to live comfortably.

Under the current system, those over age 62 who wish to retire prior to their standard retirement age (66 for most people) must do so at a reduced benefit rate. If, however, they are willing to defer drawing benefits beyond their standard retirement age, their benefit rate increases by 8% for each year they defer up to their 70th birthday.

Note, however that each additional year deferred has a greater impact in terms of reducing the post-retirement payments. A 66-year-old with a 20-year life expectancy who defers a year reduces the years of drawing benefits by 1/20th. One who defers one more year, five years later, with a 15-year life expectancy, has reduced the remaining years of drawing benefits by 1/15th.

To the extent that people can be induced to defer their retirement, our Social Security system benefits both from the additional tax revenues and from the years for which benefits are not paid. Similarly, the overall economy benefits from the additional production of those who continue working. Even the Medicare system would benefit to the extent that those covered by their employer would defer signing up for Medicare.

Clearly, increasing the propensity of people to defer their retirement has many pluses for both the individual and the economy. Can such deferrals be increased? I suggest the following ways for encouraging people to defer their retirement:

• Allow the benefit rates to continue to increase for those who wish to defer retirement past age 70;
• Allow retirees the option of drawing partial benefits while the percentage of benefits that are deferred continue to be increased;
• Promote SSI-benefit-payment deferrals with an education campaign; and
• Encourage additional years of deferral by increasing the rate of increase in the benefit. For example, benefits could be increased by 7% for the first year, 7.5% in the second, 8% in the third, and so on. This process would reflect the advantage to the system for people retiring well past age 66.

Clearly, increasing retirement deferrals would reduce the payments going out while increasing the funds coming in to the Social Security trust fund. Once benefits begin, the benefit rate will be higher, but paid for fewer years. Thus, the total amount paid out may not be very different from what would have been paid out without the deferral. Indeed, the overall economic system would also have been helped out by the tax payments resulting from the additional years of working.

This modest proposal would not only allow, but encourage those who are able to do so to continue to work productively well past the standard retirement age, without forcing continued employment on those who would find such a requirement onerous.


Ben Branch is a professor of Finance at the Isenberg School of Management at UMass Amherst; branchb@isenberg.umass.edu

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