- The Washington Times - Sunday, December 19, 2004

At last week’s White House economic conference, there was considerable discussion of the need to reform Social Security. The primary reasons given were to improve fairness for younger workers and put the system on a sound financial footing. As important as these are, however, I think there is an even more important reason to reform Social Security, and that is to keep older workers in the labor force.

The problem is that the first Baby Boomers turn 62 in 2008. At this age, one becomes eligible for early retirement under Social Security and can begin drawing benefits. Historically, benefits at age 62 were 20 percent less than at age 65, the full retirement age. To be actuarially fair, these benefits should have been less. Because of the excessive generosity of early retirement, far too many took it.

In 1960, when early retirement was introduced, just 10 percent of workers retired at 62. Another 8 percent retired before 65, with 35 percent retiring at age 65 and 47 percent retiring later. By contrast, in 2002, 56 percent of workers retired at 62 and another 23 percent retired before age 65. Only 21 percent waited until at least the normal retirement age. As a result, the average retirement age dropped from 66.2 in 1960 to 63.6 in 2002.

Over this same period, life expectancy rose sharply. In 1960, a 65-year-old man could expect to live another 13.2 years and a woman could expect 17.4 years. By 2003, a 65-year-old man could expect to live another 16.7 years, and a woman that age could anticipate 19.5 years. Thus people have retired earlier even as they live longer.

The trends of earlier retirement and longer life mean people condemn themselves to a lower standard of living in old age than if they waited a couple of years to begin drawing Social Security benefits. I think some people may not even realize the lower benefits they get at age 62 last a lifetime. They may be under the erroneous belief their benefits will be bumped up at age 65. They won’t.

In future years, early retirees will get an even worse deal. Benefits as a share of what’s called the primary insurance amount are being phased down from 80 percent for those born before 1938 to just 70 percent for those born in 1960 or later. That is, those retiring at 62 will get 30 percent less than those who wait for the normal retirement age.

Furthermore, I suspect only a very tiny number of retirees know if they had waited past 65 to draw benefits that they would get more. At present, those delaying retirement past the normal retirement age will get 7 percent more for each year that they wait until age 70. Future retirees will get 8 percent for each year they delay drawing benefits past the normal retirement age, which is in the process of rising from 65 to 67 for those born in 1960 or later.

This delayed retirement credit can very dramatically affect benefits. Those born between 1943 and 1954 will get 76 percent more each month if they retire at age 70 than if they retire at age 62. The former will get 32 percent more of the basic retirement benefit one qualifies for at the normal retirement age, the latter will get 25 percent less.

Early retirees suffer in another way. Once one begins drawing benefits before the normal retirement age, there are restrictions on how much wage income one may earn without losing benefits. Next year, one can only earn $12,000 before losing benefits. And the reduction is severe. Benefits are cut by $1 for every $2 earned over the maximum allowed.

Until 2000, a similar rule applied to all retirees on Social Security below age 70. But Congress concluded the de facto 33 percent marginal tax rate imposed by the earnings test was unfair and discouraged a significant amount of work, so the rule was abolished. Those above the normal retirement age may now earn as much as they want and still draw full benefits. However, an earnings test remains for early retirees.

Because the normal retirement age is rising to 67, this means the earnings test will apply to more and more retirees in future years. If they take early retirement in the numbers we have seen and the test is unchanged, we will see a massive withdrawal of older workers from the labor force beginning in 2008. The nation may not be able to afford it.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.

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