With the Social Security system facing insolvency by 2034, one option to address the program’s fiscal shortfall is to raise the early retirement age of 62. While little is known about the effects this would have on the financial well-being of beneficiaries, a paper released this month by the National Bureau of Economic Research sheds some light on the dynamics involved.
The Social Security Act of 1933 set the minimum age for claiming full retirements at 65, but Congress passed an amendment in 1983 that raised that age to 67, with the increase phased in over a 22-year period. The most common age for claiming benefits, however, has long been 62, an “early eligibility” option that was introduced in 1961.
Most financial advisers caution against claiming benefits years before age 67 due to the resulting reduction in the value of monthly payments. According to an overview provided by the Social Security Administration, an early claim can result in a payment reduction of up to 30 percent, depending on birth year, so that a $1,000 monthly benefit becomes $700 for the remainder of the recipient’s life. However, for millions of Americans facing health problems or a lack of employment options, early retirement is unavoidable.
The researchers behind the NBER paper — Gary V. Engelhardt of Syracuse University, Jonathan Gruber of MIT and Anil Kumar of the Federal Reserve Bank of Dallas — found that the introduction of the early retirement option lowered the average age of those claiming Social Security by about a year and a half and lowered Social Security income by an average of 1.5 percent for male-headed retired households. For those in the bottom 25 percent of the income distribution, the income drop was greater — an average of 4 percent. In other words, the early retirement option led to higher poverty.
The problem for analysts is to determine what would happen to early claimants if they had waited — an impossible task in the absence of ideal experimental conditions. While raising the age of early retirement would be good for the finances of the Social Security system — although it’s hard to say by exactly how much, since some of those who can’t avoid early retirement will end up in the disability system — and good for the finances of those who can afford to wait until age 67, there is no way to tell how early retirees would fare under a different set of rules. Early retirees are driven by a wide variety of motivations, including poor health and poverty, and while some may fully understand the long-term financial implications of making an early claim, others may not.
The NBER authors conclude that an increase in the early retirement age involves tradeoffs under conditions of imperfect information. Raising the early retirement age could help a subset of retirees by increasing their eventual payments and raising their long-term incomes. But it would hurt those who die before they turn 67, and could reduce the welfare of those who are in desperate need of money. And in the end, the economists write, those tradeoffs are a political matter.