(The opinions expressed here are those of the author, a columnist for Reuters.)
Americans are all living longer, so it only makes sense to push back the eligibility age for Social Security - right?
Pushing back the age when workers can claim their full benefit may sound like the fair thing to do in a era of rising longevity - and it would help fix Social Security’s long-range financial imbalance.
But this easy-sounding fix masks two crucial problems. It makes a higher retirement age sound painless - when it actually would cut everyone’s benefits by moving back the goal posts on when you can claim full benefits. Just as important, a higher retirement age would be especially unfair to lower-income workers.
Average longevity has been rising in the United States, but all of the gains have been experienced in higher-income households. A number of studies have reached this conclusion in recent years - but now comes a report from the horse’s mouth, so to speak - the actuaries at the Social Security Administration.
By using mortality and earnings data from the agency’s massive database on American workers, this report confirms that lifetime earnings have a profound impact on longevity. The findings should help put the brakes on any proposal to solve Social Security’s long-range financial imbalance by lifting retirement ages.
The study examines five income segments (quintiles) using Average Indexed Monthly Earnings (AIME), a Social Security measure that averages your top 35 years of earnings when you reach age 60, indexed to reflect average wage growth in the economy. The SSA actuaries compared mortality (death rates) by sex and age. They found lower mortality (death rates) for retired worker beneficiaries with higher-than-average AIME levels, and higher death rates for retired-worker beneficiaries with lower-than-average AIME levels.
The differences are expressed as mortality ratios. An AIME mortality of 1.00 means death rates for a given group were equal to the group as a whole; ratios lower than that number indicate lower mortality, while higher numbers indicate - well, earlier curtains.
Just one example of how this plays out: in 2015, retired men age 62-64 in the highest income quintile had a ratio of 0.52, while those in the lowest income quintile had a ratio of 1.77. The comparable figures for women were not much different - 0.73 for the highest income quintile, and 1.54 for the lowest.
A BENEFIT CUT - NO MATTER WHEN YOU RETIRE
Yet rising longevity is cited routinely as a justification for raising the Social Security full retirement age (FRA). Consider, for example, the Republican-sponsored Social Security Reform Act of 2016. It repeatedly references rising longevity, and a cornerstone element would gradually raise the FRA to 69.
Two years might not sound like much - but recall that we already have raised the FRA as part of the last set of Social Security reforms, enacted in 1983. At the time, Social Security faced a real crisis, with the program due to run out of funds within 18 months. The 1983 reforms gradually raised the FRA from 65 to 67 for workers born in 1960 or later.
Make no mistake - a higher FRA is a benefit cut, no matter when you retire. To understand how that occurs, it is helpful to take a quick refresher on how the timing of your claim affects benefits.
To determine your benefit amount, the SSA starts by translating your AIME into something called the primary insurance amount (PIA). This is a weighted formula that gives a higher benefit relative to career earnings for a lower earner than for a high earner - a bit like income tax brackets. You receive 90 percent of AIME for the first segment (up to $895 for 2018), 32 percent for the second bracket (up to $5,397) and 15 percent for any amount of remaining AIME.
If you wait until the full retirement age (currently 66), you would receive 100 percent of PIA. If you start at 62 (the earliest opportunity), you will receive a reduced benefit for the rest of your life - 25 percent lower. By waiting until after full retirement age (66), you would get the delayed retirement credit, which is 8 percent for each 12-month period that you delay. The credits are available until age 70.
But raising the FRA reduces benefits no matter when you claim. How does this play out? A 2015 report by a group of policy experts for the National Academy of Sciences (NAS) expresses it simply: If we raised the FRA from 67 to 70, a worker claiming benefits at age 67 would receive 100 percent of PIA before the reform, but 80 percent afterward - in other words, it is a 20 percent benefit cut.
How about workers with higher mortality rates?
The NAS study examined the impact of the changing gap in life expectancy by income over time, comparing workers born in 1930 and 1960. The researchers found that raising the FRA to 70 would fall disproportionately on lower-income workers. For men born in 1930, lifetime benefits would fall by 25 percent ($31,000) for the lowest-income workers, and 22 percent for the highest-income group ($50,000).
One solution is to revise the Social Security bend points to restore lost benefits to lower-income workers. But whatever solutions are considered should push beyond all the loose talk about averages.