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Employees often ask whether they are better off delaying retirement or retiring early, before they reach full retirement age. Different people answer that question differently. Those at lower income levels may have no choice but to start drawing Social Security benefits at age 62, the first year they can, while those at higher income levels may be able to wait until they hit 70.
Social Security benefits increase the later they are claimed, but now a paper by the Center for Retirement Research at Boston College cites key factors that may mean actuarial tables for Social Security benefits may be unfair. Interest rates are low, life expectancy has increased, and longevity improvement is greater for higher earners than for lower-paid employees. Based on these factors, authors Alicia H. Munnell and Anqi Chen analyzed what needs to change to keep Social Security benefits fair across the board.
Today, individuals claiming benefits at 62 make approximately 20 percent less per month than those who claim benefits at full retirement age—65 for those born in 1954 or earlier, 66 and two months if born in 1955 or later. In 1972, Congress allowed retirees to delay claims up to age 72. That was later reduced to age 70. Today, the annual "bonus" for any delay after full retirement age is 8 percent per year in additional benefits.
In developing their own actuarial table, the researchers found that "the actuarial adjustment factors have remained constant over several decades." But other factors have changed to alter the fairness of the scheme.
First, life expectancy has increased. For example, women's life expectancy today is five years longer than it was in 1956. Researchers found that those "who claim at 62 instead of 65 would increase their lifetime benefits by 14 percent. This smaller percentage increase suggests that a smaller reduction for early claiming would be required to keep costs constant across claiming ages."
Second, because the cost of lifetime benefits is impacted by interest rates, which have declined since the 1980s, researchers found that "longer life expectancy and lower interest rates work in the same direction. In both cases, reducing the penalty for early claiming and the reward for later claiming would better align the costs of early and late claiming."
Finally, people at different levels of the earning spectrum have different life expectancies and claiming behaviors. Those who have "more money tend to live longer. Moreover, in recent decades, higher earners have enjoyed most of the gains in life expectancy."
In addition to living longer, higher earners also typically claim benefits later. Of all those who claim benefits after their full retirement age, 40 percent are in the lowest quartile for lifetime earnings, while 51 percent are in the highest.
The bottom line, according to the researchers, is that actuarial adjustments haven't kept up with changes in other factors. As a result, the "reduction for early claiming is too large, while the delayed retirement credit—initially too small—is now about right." That said, the current adjustments "both between 62 and 65 and between 65 and 70, favor delayed claiming. As a result, they increasingly favor higher earners."
From: ThinkAdvisor
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Ginger Szala
Ginger Szala is executive managing editor of Investment Advisor magazine. She covered the financial business and alternatives industry for 30 years while editor of Futures Magazine Group. MSJ Northwestern, BA University of Wisconsin-Madison. She is based in Chicago. Go Blackhawks!
