Jane the Actuary Retirement

Forbes post, “Let’s Make Little Plans: A New Proposal To ‘Hack’ Social Security”

Originally published at Forbes.com on December 12, 2019.

 

Today the National Academy of Social Insurance (NASI) released the winners of the Social Security Policy Innovations Challenge it sponsored along with the AARP. I’m happy to say that among the four winning proposals is one with my name on it, so I have been waiting impatiently for this press release so I could share this proposal with my readers.

Chicago politicians love to cite Daniel Burnam’s famous “make no little plans” quote in promoting their ambitious proposals to remake the city in one way or another. And I, too, have never hesitated to flog my own Big Ideas, such as the “Basic Retirement Income” Social Security reform. But this challenge called for feasible ideas, and, I’m pleased to say, this one fits the bill: unlike the parade of proposals which pair new benefits with tax hikes, it is not just revenue-neutral but essentially costless, while providing new options for those workers who are looking at retirement in advance of the Social Security Full Retirement Age, that may help mitigate the effects of a reduction that may be as much as 30% of the total benefit.

It’s a hack, not unlike the “life hacks” promoted in YouTube videos and Facebook posts: a simple change that’s not earth-shattering but has the potential to provide meaningful improvements to workers, by ending the one-size-fits-all aspect of Social Security benefit commencement.

After all, the way the system functions now, workers choose an age between 62 to 70 to begin receiving benefits. Those under age 66 (at present) or age 67 (after the final phase in of the retirement age increase in 2027) will see benefit cuts of between 25% (now) and 30% (in 2027); at the same time, those who defer benefit commencement to age 70 receive an increase of between 24% (for the FRA 67 folks beginning in 2027) and 32% (at present). And those cuts apply not only for the period prior to full retirement age, but permanently.

I therefore proposed that, to mitigate the impact of these reductions, workers be able to choose to partially begin benefits at a given point in time, then switch to full benefits later on. Straightforwardly enough, this would mean that only the portion of the benefit begun early would be reduced, and the rest would be available “in full” (or even with the later-retirement credits) later.

This might seem like an odd change — who would want only part of their benefit? Maybe not too many people. But it some cases it could make a difference: for example, someone who has to change to a lower-paying job because their existing one becomes too physically strenuous, or someone who drops to a reduced work-hours schedule, or someone who has lost their longtime job and can only find a lower-paying replacement. The opportunity to take a partial benefit might be just enough to help them stay in the workforce for more years than they otherwise would have, and retire at a later age.

As the proposal summary explains,

“For a part-time worker wishing to claim half benefits at 62 whose full monthly benefit was $1,000, this option would provide him $350 in additional monthly income (half of the $700 he would have received), on top of the income he received. When beginning to receive his full benefit at age 67, he would then receive $850 per month ($350 for the continuing age-62-commenced portion and $500 for the half begun at age 67), rather than the $700 he would have gotten. This provides an additional $1,800 per year in benefits, on top of the added retirement savings he was able to accrue as a result of working for more years. If the worker were able to delay claiming benefits until age 70 as a result of continuing part-time work, the ultimate benefit would be $970, virtually equivalent to what he would have received had he not claimed early at all.”

It should also go without saying that the existing penalties for working while collecting Social Security would be removed. Actuarially, however, this would not add to the cost, since these reductions are “repaid” to recipients in the future.

And as the infomercial announcer says: But wait – there’s more!

Often, workers who find themselves unemployed with unemployment benefits exhausted when they reach their 62nd birthday, apply for Social Security benefits, reduction and all, and consider themselves “retired” and their working lifetime over, rather than continuing to work. After all, the rules about stopping and restarting Social Security benefits are not easy to understand and limited in their applicability, and the restrictions on working while receiving benefits are equally a deterrent, even though there are minimum earnings thresholds and, in theory, the money is “repaid” actuarially later on.

Therefore, I proposed that it be a simple matter to stop and restart benefits, with no penalties or complex strategies required, at any time before the Late Retirement Age, and that a worker’s retirement benefits be actuarially increased upon restarting benefits to reflect the in-between years in which benefits were forgone. If early commencements were marketed as possibly temporary, by the Social Security Administration and by advocacy/educational groups, it would help individuals stay in the workforce longer and boost their ultimate retirement income.

And none of this has any cost associated with it other than the moderate administrative expense of updating the Social Security programming (which surely needs periodic updating anyway) and retraining personnel (who surely need periodic refreshers anyway). What’s more, under at least one of the various entirely reasonable methods of calculating Social Security adjustment factors, there is no particular cost to the system of any given individual retiring earlier or later, and, as a bonus, workers continuing to work will continue to pay FICA taxes into the system. And as a final added bonus, the evidence continues to accrue that workers who retire later are in better health and less likely to experience cognitive decline, even when controlled for other factors.

And finally, yes, even with all the partisan wrangling, I still like to believe that it’s possible to take at least small bipartisan steps towards Social Security improvements, and I believe that this “Social Security hack” is one such step that both parties can support as a way to move beyond the hardened battle lines on the subject.

So, Senators and Congresscritters, who’ll be the first to sponsor a bill making this change? Heck, it’s Christmastime — I’ll throw in a tin of Plätzchen cookies to sweeten the deal (and this isn’t even a pun – our family’s favorite Christmas cookie isn’t very sugary).

And thanks to NASI and AARP for sponsoring this challenge. Readers, be on the lookout for my comments on the other proposals as well. (But first, I’ll be baking plätzchen . . . )

 

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.

Jane the Actuary Retirement

Forbes post, “Get Your Priorities In Order, Illinois”

Originally published at Forbes.com on December 5, 2019.

 

Which matters more:

Providing the necessary funding for the intellectually disabled to be able to access group homes and day programs after they age out of the public school system?

Or preserving, in the state pension plans, the 3% fixed annual cost-of-living increases, and unreduced retirement as early as age 55*?

The Chicago Tribune today featured as its lead editorial: “Why aren’t adults with developmental disabilities getting community care faster? Short answer: It’s Illinois.”

This was a follow up to a report on Tuesday, “Why adults with developmental disabilities are waiting seven years, or longer, for programs they need to live on their own.“ which reported that

“[N]early 20,000 people with developmental disabilities in Illinois . . . are on a waiting list to get into adult programs. Many of them come from families who don’t have a way to pay for home care, job coaches or other services.

“Most wait an average of seven years before they are selected, despite a court order in 2011 that Illinois shrink the list and do other things to improve how it serves developmentally disabled adults.”

“Kathy Carmody, CEO of the Institute on Public Policy for People with Disabilities, traces the problems to years of political decisions by both parties. ‘This is an Illinois issue,’ she said. ‘There is a decades long history of decay and neglect, but we have to start righting the ship to ensure that the community services remain an option for people.’”

The editorial explains further:

“The state reimburses care providers less than the minimum wage for workers, leaving the organization to pay the difference itself or skimp on staffing. The Illinois attorney general’s office said in a recent filing that staffing problems have resulted in ‘estrictions in community integration opportunities, overworked staff and significant overtime being paid.’”

What does this have to do with pensions?

Only that the refusal of JB Pritzker and others to consider true pension reform doesn’t occur in a vacuum.

When adding up the state’s contributions to pension funds, its payments on Pension Obligation Bonds, and its spending on medical benefits for retirees, a full 25% or more of the state’s budget is going to pension and pension-related spending. (See the Wirepoints calculation and the Illinois Policy Institute calculation; a similar calculation by the Civic Federation placed the figure at 20% based only on pension contributions.)

What’s more, the Illinois Policy Institute further spelled out some of the ways in which government social services spending has been cut in the past decade while pension spending has been growing, and, indeed, spending on the Developmental Disability Community Transitions program has dropped by 81% from 2010 to 2020.

This is infuriating.

Pritzker promises that all our troubles will be over when the state implements a graduated income tax and when revenue starts to flow into state coffers from all the pot its residents will be smoking come January. But this is a fairy tale. Without a real, lasting reform to pensions, the disabled will be left waiting for the funding boost they need.

 

*The specific early retirement provisions vary by plan:

  • Age 60 with 10 years of service or 55 with 35 years, for teachers;
  • Age 60 with 8 years of service or with 85 age + service points, for state employees; and
  • Age 62 with 5 years, age 60 with 8 years, or at any age with 30 years of service, for state university employees,

in each case, for those employees hired before 2011.

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.