Today the National Academy of Social Insurance (NASI) released the winners of the Social Security Policy Innovations Challenge it sponsored along with the AARP. I’m happy to say that among the four winning proposals is one with my name on it, so I have been waiting impatiently for this press release so I could share this proposal with my readers.
Chicago politicians love to cite Daniel Burnam’s famous “make no little plans” quote in promoting their ambitious proposals to remake the city in one way or another. And I, too, have never hesitated to flog my own Big Ideas, such as the “Basic Retirement Income” Social Security reform. But this challenge called for feasible ideas, and, I’m pleased to say, this one fits the bill: unlike the parade of proposals which pair new benefits with tax hikes, it is not just revenue-neutral but essentially costless, while providing new options for those workers who are looking at retirement in advance of the Social Security Full Retirement Age, that may help mitigate the effects of a reduction that may be as much as 30% of the total benefit.
It’s a hack, not unlike the “life hacks” promoted in YouTube videos and Facebook posts: a simple change that’s not earth-shattering but has the potential to provide meaningful improvements to workers, by ending the one-size-fits-all aspect of Social Security benefit commencement.
After all, the way the system functions now, workers choose an age between 62 to 70 to begin receiving benefits. Those under age 66 (at present) or age 67 (after the final phase in of the retirement age increase in 2027) will see benefit cuts of between 25% (now) and 30% (in 2027); at the same time, those who defer benefit commencement to age 70 receive an increase of between 124% (for the FRA 67 folks beginning in 2027) and 132% (at present). And those cuts apply not only for the period prior to full retirement age, but permanently.
I therefore proposed that, to mitigate the impact of these reductions, workers be able to choose to partially begin benefits at a given point in time, then switch to full benefits later on. Straightforwardly enough, this would mean that only the portion of the benefit begun early would be reduced, and the rest would be available “in full” (or even with the later-retirement credits) later.
This might seem like an odd change — who would want only part of their benefit? Maybe not too many people. But it some cases it could make a difference: for example, someone who has to change to a lower-paying job because their existing one becomes too physically strenuous, or someone who drops to a reduced work-hours schedule, or someone who has lost their longtime job and can only find a lower-paying replacement. The opportunity to take a partial benefit might be just enough to help them stay in the workforce for more years than they otherwise would have, and retire at a later age.
“For a part-time worker wishing to claim half benefits at 62 whose full monthly benefit was $1,000, this option would provide him $350 in additional monthly income (half of the $700 he would have received), on top of the income he received. When beginning to receive his full benefit at age 67, he would then receive $850 per month ($350 for the continuing age-62-commenced portion and $500 for the half begun at age 67), rather than the $700 he would have gotten. This provides an additional $1,800 per year in benefits, on top of the added retirement savings he was able to accrue as a result of working for more years. If the worker were able to delay claiming benefits until age 70 as a result of continuing part-time work, the ultimate benefit would be $970, virtually equivalent to what he would have received had he not claimed early at all.”
It should also go without saying that the existing penalties for working while collecting Social Security would be removed. Actuarially, however, this would not add to the cost, since these reductions are “repaid” to recipients in the future.
And as the infomercial announcer says: But wait – there’s more!
Often, workers who find themselves unemployed with unemployment benefits exhausted when they reach their 62nd birthday, apply for Social Security benefits, reduction and all, and consider themselves “retired” and their working lifetime over, rather than continuing to work. After all, the rules about stopping and restarting Social Security benefits are not easy to understand and limited in their applicability, and the restrictions on working while receiving benefits are equally a deterrent, even though there are minimum earnings thresholds and, in theory, the money is “repaid” actuarially later on.
Therefore, I proposed that it be a simple matter to stop and restart benefits, with no penalties or complex strategies required, at any time before the Late Retirement Age, and that a worker’s retirement benefits be actuarially increased upon restarting benefits to reflect the in-between years in which benefits were forgone. If early commencements were marketed as possibly temporary, by the Social Security Administration and by advocacy/educational groups, it would help individuals stay in the workforce longer and boost their ultimate retirement income.
And none of this has any cost associated with it other than the moderate administrative expense of updating the Social Security programming (which surely needs periodic updating anyway) and retraining personnel (who surely need periodic refreshers anyway). What’s more, under at least one of the various entirely reasonable methods of calculating Social Security adjustment factors, there is no particular cost to the system of any given individual retiring earlier or later, and, as a bonus, workers continuing to work will continue to pay FICA taxes into the system. And as a final added bonus, the evidence continues to accrue that workers who retire later are in better health and less likely to experience cognitive decline, even when controlled for other factors.
And finally, yes, even with all the partisan wrangling, I still like to believe that it’s possible to take at least small bipartisan steps towards Social Security improvements, and I believe that this “Social Security hack” is one such step that both parties can support as a way to move beyond the hardened battle lines on the subject.
So, Senators and Congresscritters, who’ll be the first to sponsor a bill making this change? Heck, it’s Christmastime — I’ll throw in a tin of Plätzchen cookies to sweeten the deal (and this isn’t even a pun – our family’s favorite Christmas cookie isn’t very sugary).
And thanks to NASI and AARP for sponsoring this challenge. Readers, be on the lookout for my comments on the other proposals as well. (But first, I’ll be baking plätzchen . . . )
What do you think? Share your comments at JaneTheActuary.com!