Waiting for retirement could help fix system

Experts say delay saves Social Security benefits

Author: Kevin G. Hall

Published: February 17, 2005

While Federal Reserve Chairman Alan Greenspan gave a cautious boost Wednesday to the Bush administration's plan to alter Social Security, another option some are suggesting is to delay the early retirement age, now 62, when people can begin taking benefits.

With President George W. Bush and Congress looking for ways to close a projected Social Security funding shortfall of trillions of dollars, some experts say delaying early retirement could reduce a shortfall that the system's trustees project at $3.7 trillion over the next 75 years.

Nearly six in 10 eligible Americans take early retirement. That trend could strain the system's finances badly when baby boomers -- those born from 1946 to 1964 -- begin retiring in 2008.

The retirement of some 76 million boomers will drain Social Security's reserves, according to government figures. By 2030, one-third of the U.S. adult population will be collecting Social Security checks. If 60 percent retire early, that's 45.6 million people taking cash out of the Social Security system starting at age 62.

When Americans retire early, Social Security takes a double whammy: Benefits are paid out earlier, and the retirees stop paying wage taxes into the system sooner than they would if they retired at 65. Workers who retire at 62 get a monthly benefit that's 20-30 percent below what they would get if they waited until age 65, but that's not enough to offset the net impact on the system of mass early retirement.

"It's the combination of the two that makes early retirement more expensive," said Eugene Steuerle, a senior fellow at the Urban Institute, a liberal research center in Washington. "A year or two of more work is a powerful increase" in funds for any system.

Cost concerns

Greenspan gave his qualified blessing to Bush's call to create private investment accounts as part of an overhaul for Social Security, but he expressed concerns about high costs.

In testimony before the Senate Banking Committee, Greenspan said financial markets might blanch at the estimated trillions of dollars in transition costs proposed by Bush. He advised Congress to proceed with care.

"My caution here is based on not knowing, and not knowing how to know in advance, how markets will respond," Greenspan said.

Greenspan repeated that he's long favored the concept of personal accounts because they effectively would force lower- and middle-income Americans to save, and thus boost the nation's stock of capital available for investment, which fuels economic growth.

Bush's plan would allow workers age 50 and younger to take 4 percentage points of their salaries that now goes to Social Security and instead invest in a personal retirement account of stocks and bonds. Congress has yet to wrestle with the proposal.

Alternatives abound

Bush pushed the private investment strategy during his State of the Union address. But he also identified delaying early retirement as one of a handful of ways he'd consider to fix Social Security.

As far back as the mid-1990s, an advisory panel said the future shortfall could be reduced by 13 percent or more simply by raising the early retirement age by the same rate that the regular retirement age rises.

Under a schedule that Congress set in 1983 -- the last time Social Security was revamped -- the regular retirement age will rise to 66 for people born from 1943 to 1954, and to 67 for those born in 1960 and later. For the birth years 1955 to 1959, the retirement age rises by two-month increments each year.

Congress didn't change the early-retirement age then, but some leading lawmakers say they are considering it now.

Sen. Trent Lott, R-Miss., is expected to propose legislation that would index future rises in the ages for both regular retirement and early retirement to changes in the average U.S. life span. Men now expect to live 16 years after they retire at 65; women, 19 years.

Congress also is talking about raising the regular retirement age to 70. That would fix about 36 percent of the funding shortfall, Social Security actuaries said.

Under the current ratio of benefit reductions for early retirement, workers seeking to retire eight years before a usual retirement age of 70 would lose half the monthly benefit they'd get at 70. Assuming that most people probably would choose to work a few more years, that would be a de facto increase in the early retirement age without changing the law.

Raising the retirement or early-retirement age may prove a tough sell to the American public. Today, retirement isn't an end but often a start to a fuller life.

The AARP defends early retirement. Tinkering with it is "one of the public's least favorite options," said David Certner, the head of the AARP's federal affairs office.