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Retirement Planning > Social Security

Fixing Social Security: Be Careful What You Wish For

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Raising the full retirement age or cutting retirement benefits are often presented as part of the solution to fixing Social Security, but a new study from the Brookings Institution shows how those potential fixes could have long-standing unintended consequences.

Raising the retirement age “would make sense if the gains in expected life spans are enjoyed equally by rich and poor,” according to the report. “However, if life expectancy is increasing only for those at the top of the income distribution, an increase in the retirement age seems unjust for the lower income group, which have unchanged or only marginally improved life expectancy.”

And that appears to be the case. “Improvements in life expectancy have been highly unequal, and low-income workers have experienced much smaller gains in life expectancy when compared with workers further up the income scale,” according to the report.

But all recipients would be impacted. Raising the retirement age would reduce benefits across the board by 6% to 7.5%, affecting low- and high-income seniors, says Gary Burtless, an economist at Brookings and co-author of the report, titled “Later Retirement, Inequality in Old Age, and the Growing Gap in Longevity Between Rich and Poor.”

Trimming retirement benefits, however, would hurt lower income seniors more than wealthier ones because of the disparities in life expectancy, according to the report. Since lower-income seniors tend to not live as long as wealthier Americans, they would collect less in benefits over their lifetime. For wealthier Americans those cuts would be offset in part by collecting benefits for longer.

One of the surprising findings of the Brookings report is its data on delayed retirement. The report found that more Americans working at age 65 or older are working full time rather than part time, which was was previously the case. In 2014, 60% of older workers were working full time and 40% were working part time. In 1995, less than half worked full time and 56% worked part time. This delayed exit from the work force is “concentrated among the best educated and best paid people,” Burtless says.

Their jobs tend to be less physically challenging, and there are incentives to work longer. Fewer seniors are collecting pensions, and working longer let them boost contributions to 401(k) and other defined contribution plans, according to the report. In addition, fewer seniors under 65 are covered by employer-provided health insurance, and few over 65 are eligible for employer-subsidized insurance.

Working longer and collecting Social Security benefits later also makes sense because Social Security benefits increase with age. Those collecting at full retirement age, currently 66 for those born between 1943 and 1954, receive 25% more per month than those collecting early, at age 62. Collecting at 70 boosts benefits another 32%.

But if an increasing number of seniors begin collecting at age 70, the Social Security system itself could be more at risk. “It’s not completely clear that the Social Security Administration takes explicit account of future liabilities,” says Burtless. “If the mortality rate is lower at the high income level and higher at the low income level, benefits owed will not decline as fast as the mortality rate.”

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