Forbes Post, “Is A Hike In Social Security Retirement Age Really Just A Benefit Cut?”

Originally published at Forbes.com on October 5, 2018 and October 4, 2018.

 

You’ve heard this before, with respect to the prospect of raising the Full Retirement Age in Social Security:

“Raising the retirement age amounts to an across-the-board cut in benefits, regardless of whether a worker files for Social Security before, upon, or after reaching the full retirement age.”  Paul N. Van de Water and Kathy Ruffing, Center on Budget and Policy Priorities.

“[R]aising the full retirement age is nothing more than a benefit cut on future retirees.”   Sean Williams, The Motley Fool.

“Raising the full retirement age may sound innocuous. But it is nothing more than a benefit cut, and one that puts low-paid workers at risk.”  Alicia H. Munnell, director of the Center for Retirement Research at Boston College, writing at MarketWatch.

And these are just the top three search-engine results.

But here’s where my observation yesterday that the United States is in the minority of Western countries with respect to our Social Security benefit structure, comes into play.  Other countries are much more likely to either have a fixed retirement age with no early retirement option, or to allow early retirement only with a very extensive work history and, in that case, without reductions.

Here’s why this matters:

In the U.S. Social Security old-age retirement benefit system, taking into account its existing plan design permitting retirement at a range of ages, and considering the way the hike in the “full retirement age” was implemented, in which both the minimum age and the age of maximum benefit stay unchanged and the benefit level at any given year is reduced, yes, the 1983 “full retirement age” increase was indeed  functionally a benefit cut.

And if we followed the same pattern, with a range of retirement ages from 62 to 70 but with the age for so-called “full retirement” moved up to 68 or even later, then we would be implementing a further benefit cut.  This may nonetheless be a part of an overall Social Security reform package, and may be reasonable and appropriate to the extent that the combination of increasing health of and decreasing physical demands on older workers pair together to mean that individuals are able to work longer without undue hardship.  However, unless workers are able to continue to boost their benefits via late-retirement increases beyond the age of 70, even workers who plan to retire late to make up the difference will be unable to fully do so.

But that doesn’t mean that any such retirement age increase is necessarily a benefit cut.

Consider the Danish system, in which the retirement age increases to 68 in 2038 and is scheduled to increase based on further life expectancy increases since then.  Clearly, there is no way in which a worker reaching the age of 67 in 2038, and obliged to defer retirement another year, has had a “benefit cut” in the sense of a percentage reduction of monthly benefit payments.

At the same time, yes, in principle, one could say that the total value of benefit payments received over one’s lifetime has been reduced.

Consider that a man reaching age 65 today can expect to live 19.3 more years; a woman,  21.7.

This means that, from that age 65 standpoint, ignoring any time-value of money considerations, one can expect to collect 193,000 or 217,000, respectively from a hypothetical $10,000 benefit starting at age 65.  If the retirement age was raised by a year, then, again based on this simplistic calculation, one’s lifetime benefit would be 183,000 or 207,000, about a 5% decrease.

But this sort of “total future benefits” calculation (even disregarding the fact that actuaries the world over are cringing at the math) is simply not a reasonable calculation unless one also takes into account increasing life expectancy.  Most retirement systems do that implicitly in assuming that their retirement age increases pair with historic and forecast future life expectancy; the Danish system explicitly builds this in explicitly, with the intention that the average length of time in retirement stays constant at 14.5 years.

The bottom line is this:  we need a better, more targeted, solution for those unable to work up to their official Full Retirement Age, let alone maximum benefit age, than the existing method of allowing early retirement at the cost of significant benefit reductions.  And creating and implementing this solution will allow us to consider the appropriate retirement age/Social Security benefit commencement age, for the majority of the population, in a more sensible manner.

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Bonus content:  how does the US retirement age compare globally?  

In the news yesterday:  despite public protests on the matter, Russian President Vladimir Putin signed into law a pension reform bill which increases the retirement age, formerly age 55 for women and 60 for men, to age 60 and 65, respectively.  (See Radio Free Europe for coverage.)

From an American point of view, one might be surprised that the retirement age was ever this low in the first place, or that retirement ages were and still remain different for men and women.  (This is not unusual, as I wrote back in March.)  One might have even a bit of sympathy for Russian men, though, whose life expectancy is a mere 66 years; the Independent (UK) reports that 40% of men will not live to retirement age under the new law.

But here’s something else readers might not notice:  there is no early retirement option available to Russian retirees.  In fact, the Moscow Times reports that the government attempted to mitigate concerns over livelihood in those pre-retirement years by criminalizing the firing of workers in the five years preceding retirement.

In contrast, American workers in the years prior to normal retirement age who exhaust their unemployment benefits, or those who consider themselves likely to die young because of family history or their own poor health, are likely to simply start receiving Social Security benefits with the early retirement penalties.  In fact, our system, despite the official “full retirement age” of 67 for by now most workers, actually provides “full” or maximum benefits at age 70, with reductions or de facto reductions for benefit commencement prior to that age — a provision that’s either a bug or a feature, depending on your perspective:  it provides greater flexibility but at a cost in lost benefits that may create financial hardship down the road.

And here’s what’s worth knowing:  the Russian system with a fixed single retirement age, is actually the norm.  Our system is unusual, as other countries which allow for early retirement generally pair that with substantial work history requirements.  Here’s a listing of Western European countries, from Social Security Programs Throughout the World:

Belgium:  age 65, rising to age 67 in 2030, or age 63 with 41 (42 in 2019) years of coverage (work history).

Denmark:  age 65, rising to age 68 in 2038 with further life-expectancy increases afterwards.  No benefits prior to this age.

France:  the “normal retirement age” is 62, but only with those with 41 years of coverage, rising to 43 years by 2035 (“coverage” also includes 2 years’ bonus per child and unemployment benefit periods); those without sufficient work history can retire at age 62 with a reduction of 5% for each year of missing work history, or can retire at age 67 in any case.

Germany:  age 65 and 7 months, increasing to age 67 in 2029, or age 65 1/2, increasing to age 65 in 2029, with at least 45 years of contributions.

Ireland:  age 66, increasing to age 68 by 2028.  No benefits prior to this age.

Netherlands:  age 66, rising to age 67 and 3 months by 2022.  No benefits prior to this age.

Switzerland:  age 65 for men or age 64 for women; early retirement is available at age 63/62 with a reduction of 6.8% per year.

United Kingdom:  age 65 for men or age 63 for women, rising to 67 for both in 2028.  No benefits prior to this age.

So I invite readers to contemplate this list of retirement ages and imagine that when Congress had increased the normal retirement age from 65 to 67 in 1983, they had likewise increased the early retirement age a corresponding amount, or removed the option entirely, or added a similar work-history requirement.  What would have happened?  Would Americans have adjusted their retirement patterns accordingly, and would employers have adjusted their expectations for when a worker is “too old” to hire or to stay employed?  Does the “safety net” element of early retirement for those who are unable to find work or are in ill health but not to such a degree as to qualify for disability benefits, come at too high a cost, in terms of benefit reductions, compared to other ways of providing those benefits, such as extended unemployment benefits for near-retirees or partial-disability benefits?

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.