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Keep on working…till 70?

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So what is the right age at which to start claiming Social Security benefits? According to a new study from the Center for Retirement Research at Boston College, it’s 70.

“Social Security’s Real Retirement Age is 70,” written by Alicia H. Munnell, director of the Center for Retirement Research and the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management, argues that, based on a number of dynamics like increasing longevity, the ability for Social Security to replace a greater percentage of working income, higher benefit amounts at ages beyond the designated full retirement age, among other factors, working to that age is appropriate for many. Her conclusion appears to support the findings of several studies of pre-retirees who expect to remain in the workforce past age 65 (whether willingly or not).

In particular, Munnell analyzes the relationship between replacement rates – Social Security benefits as a percentage of pre-retirement earnings – and age. What she found is that for a median wage earner who claims at age 70, the replacement rate hovers at around 50 percent.

Yet Munnell further reviews what she terms the “net” replacement rate, which takes into account Medicare parts B and D deductions from Social Security as well as taxes on Social Security benefits. Consequently, “the ultimate net replacement rate at age 70 will equal 43 percent once the Full Retirement Age has moved to 67,” Munnell writes. That percentage, she continues, combined with 401(k) savings and home equity, provide the basis of a secure retirement. Conversely, those who retire at 62 stand to capture a 24 percent replacement rate, while retiring at 65 nets a 31 percent replacement rate.

Impact of socio-economic status

Munnell’s report also looks at the impact of socio-economic status on lifespan and retirement. Citing statistics from the National Longitudinal Mortality Study, Munnell notes that men whose 1980 family income fell in the top 5 percent had a life expectancy at all ages that was roughly 25 percent longer than those in the bottom 5 percent. Therefore, Munnell asserts that “this strong and increasing relationship between earnings and life expectancy makes it difficult to design any equitable retirement benefit structure.”

Another dynamic in the equation is the fact that more older people are staying in the workforce. The U.S. Census Bureau found that 30 percent of men age 70 were employed in 2012, a substantial rise from 1985, but below the rate charted in 1970. That trend could be due to several factors, Munnell points out, such as Social Security and defined benefit plans combining to create strong incentives to not work beyond 65 in the 1970s and 1980s.

More older workers could remain in the workforce in the future, but that would hinge on several factors such as their ability to work at that age and educational levels (highly educated workers tend to stay on the job longer). Moreover, it has yet to be determined how many older workers would need to still be employed to justify setting 70 as the Social Security retirement age.

Extending the Social Security retirement age to 70 is consistent with the life expectancy, health and education of the majority of workers, Munnell concludes. However, it would make it tougher financially for workers who do retire early, she concedes.

She does not favor “constantly” reducing benefit levels by increasing the full retirement age, which places a hardship on those who cannot change their retirement age. Instead of cutting benefits, she suggests changing the benefit formula. “Such an approach allows for larger cuts for the higher-paid than for those at the bottom of the earnings distribution,” Munnell writes.

Lastly, she advocates abolishing the full retirement age concept altogether, which would, in turn, simplify the program’s benefit structure. “It would clearly signal that claiming at age 70 provides the appropriate benefit and would encourage people to work longer,” Munnell concludes. “Eliminating the concept would also force policymakers to call a cut a cut, and perhaps target reductions where they would cause less pain.”

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