Social Security Reform May Spur More Seniors To Keep Working

Letting people pass on benefits as inheritance may provide incentive

Author: Jed Graham

Published: August 16, 2005

Seventy years after FDR signed the Social Security Act on Aug. 14, 1935, retirees are living longer but starting their golden years earlier.

The program intended as a safety net is becoming a security blanket to facilitate early retirement.

In 1950, a typical retiree didn't claim benefits until 68. Now, despite longer lives and better health, average retirees get their first Social Security check in the mail around the time they turn 64.

President Roosevelt's task force, in its 1935 report, said Social Security would support seniors "beyond the productive period."

But Urban Institute senior fellow Eugene Steuerle told a House Ways and Means Committee hearing that it has "morphed into a middle-age retirement system."

As work force growth slows and the senior population explodes, those extra years of life spent in retirement will exacerbate the funding challenge. So reformers aim to extend careers by curbing incentives to retire early and improving incentives to stay on the job.

Since the most common retirement age, 62, is also when people can first get benefits, raising the retirement age might be the simplest way to prolong careers. Some also think a system of personal accounts could help by creating a clearer link between working and growing one's wealth.

"If you work an extra year, you not only make an extra year of contributions, but you actually earn an extra year of interest," said Sylvester Schieber, vice president at benefit consultant Watson Wyatt Worldwide and part of the Clinton administration's 1994-96 Social Security advisory council.

Social Security does have some built-in work incentives. A person who retires at 62 gets a lifetime monthly benefit equal to only 75% of the benefit available at 66. For those who work beyond the normal retirement age, their monthly benefit will rise 8% for each extra year of work until 70.

Those delayed retirement credits ensure that those who defer filing will still get the same lifetime benefits if they reach life expectancy. Those who live longer come out better; those who die earlier lose out.

The chance to deposit a share of payroll taxes in a personal account would make the value of an extra year of work more certain, Schieber says. "Even if they don't live as long as they expect, then their heirs will get the accumulating cash," he said.

Social Security is received as a lifelong annuity. The lack of any chance to pass on wealth seems related to early retirement, Schieber says.

In employer-based pension plans, people who only have an annuity option "tend to retire about three years earlier" than those who can accumulate inheritable assets, he said.

A new study on Chile's shift from a defined benefit system to a personal-account system noted a link between ownership and career length. Estelle James of the Urban Institute and Alejandra Cox Edwards of California State University found that "the labor force participation rates of older men rose substantially" after the 1981 reforms. Other changes, such as a big cut in Chile's payroll taxes, also played a role.

Some scholars doubt personal accounts would alter retirement decisions. A 2003 analysis by Alan Gustman of Dartmouth and Thomas Steinmeier of Texas Tech found that personal accounts equal to 2% of payroll as proposed by President Bush's Social Security commission would have a "minimal" impact. If stock returns were really good, people might retire earlier, they wrote.

An "overlooked" but key factor in early retirement "is people's desire to have what they want now rather than later, called a time preference," Gustman and Steinmeier wrote.

They found that the commission idea most likely to spur delayed retirement was to limit the growth in initial benefits by pegging them to inflation, instead of wage growth.

For some, the chance to deposit a share of the 6.2% individual payroll tax in a personal account would clearly raise the return on work.

Spouses without steady work histories receive benefits based on a partner's earnings history. Thus, they "gain no additional Social Security benefits from work," Urban Institute scholars noted in a 2004 study, "Does Work Pay at Older Ages?"

Schieber supports ending payroll taxes for work past the normal retirement age. As it is now, "people pay more and more money into the system without any return," he said.

It's one thing to ask people to delay retirement, and another to create a workplace that welcomes seniors.

If phased retirement programs that let people gradually reduce their hours were widely available, "inducing older workers to work longer would be more feasible," a 2003 Urban Institute study found.

Such programs "are rare today in the private sector," partly because of the "design nightmare" involved, the report said. The tax code, Age Discrimination in Employment Act and Employee Retirement Income Security Act all pose obstacles.