Forbes post, “Is This Longevity-Annuity Social Security Proposal The (Retirement) Holy Grail?”

Originally published at Forbes.com on April 18, 2018.

 

Pretty much anyone who hangs up their shingle as a “retirement policy expert” is busily trying to solve two issues:  increasing the level of savings before retirement, and increasing the degree to which that savings is transformed into retirement income that is secure and reliable.  About the former I’ll have more to say in later articles, but for today I want to address the latter issue, in light of a recent Pew issue brief, “Auto-IRAs Could Help Retirees Boost Social Security Payments.”

Here’s the background:

It’s widely acknowledged that continuing to work for some additional length of time beyond the initially-expected retirement age can add substantially to one’s retirement benefits, and one of the pieces of advice that’s floating around at the moment, with respect to retirement, is to delay collecting your Social Security benefits as long as possible.  Typically that’s meant to be accomplished by means of continuing to work, but the good folks at Pew propose something different, to the extent that state-managed auto-enrollment IRAs result in more people having modest amounts of retirement savings.  These retirees, they suggest, shouldn’t try to spread their savings out over the course of their retirement years to supplement their Social Security check, but instead spend down their savings right away in order to defer collecting Social Security and boost their benefits.

The logic here is unassailable:  regardless of whether one’s “full retirement age” is the age 65 of the past, age 66 for those now at retirement age, or age 67 for year-of-birth 1960 and later, the parameters for retirement age adjustments still works the same:  one may choose to collect Social Security benefits at any age between 62 and 70, but that benefits check increases for every year that one waits.  And despite the increase in the age at which the full benefit formula applies without reduction, people still think of the old Social Security normal retirement age (and still the Medicare eligibility age) as “Retirement Age,” and think of the earliest eligibility of 62 as another reasonable choice — hence, these are still the most common ages to commence benefits even with the full retirement age nominally now age 66.

But there is a substantial benefit to waiting until age 70.  Let’s look at the numbers.

The Social Security website helpfully provides both the maximum benefits, as if a worker earned wages greater than the “wage base” for each of 35 years of employment, and an example which is based on a worker with average wages (approximately $54,000).  Separately, they provide the rate at which benefits increase for each year beyond Full Retirement Age that one delays benefits:  for everyone born 1943 or later, benefits increase 8% per year after Full Retirement Age (FRA) up until age 70.  In addition, for each year before the FRA, benefits are reduced by 6.7% (for the first three years) or 5% (more than three years).

Here’s what this looks like, as a percent of pay at retirement for an average worker (with certain simplifications):

Retire at age 62, collect 30% of pay.

Age 66:  40% of pay

Age 70:  53% of pay

And while 53% of pay isn’t spectacular, it’s a heck of a lot better than 30%.

So far, so good, right?  What’s more, Social Security checks are guaranteed lifetime income, with built-in COLAs, without the high cost of having to go out and buy an annuity from a salesman.  That’s pretty hard to beat.

But let’s take it a step further:  what if the Social Security Administration, via a legislation change, allowed this late-retirement benefit boost to continue beyond age 70, up to 75 or even beyond, as far into retirement as one could manage to continue to support oneself on retirement savings, a part-time job, or income of whatever sort?  It would be a game-changer in terms of providing the lifetime income that everyone is looking for.  Waiting until age 75 to collect Social Security, based on the same late retirement increases as exist in current law up to age 70, would increase pay replacement percentages from Social Security alone up to 70% for the average worker.

It’s almost too good to be true.  And, yes, in view of full disclosure, there is a catch.

The catch is this:

it wouldn’t be actuarially fair.  Yes, to begin with, it’s plain that a figure as round and level as 8% could only ever be an approximation of actuarially equivalent adjustment for delaying benefits, and I’m not going to claim I have the tools at hand to calculate the “correct” adjustment factors.  But consider that a sad fact of life is that not only are those workers with relatively more money advantaged in various ways compared to those with less, but their life expectancy is also higher.  And it’s precisely this group that would have the ability to defer collecting Social Security checks, so a calculation of adjustment factors based purely on actuarial tables, rather than taking into account the motivation that healthier people would have to try to increase their benefits by deferral, would be doubly unfair, because unequal benefits would be going to those who are both healthier and wealthier, on average, than the norm.

That being said, even if the increase factor is less dramatic when a proper actuarial equivalence calculation is performed, I’d suggest that this proposal nonetheless has a lot to recommend it.  Consider that, in response to worries about outliving income, one common existing proposal is to promote the idea of “longevity insurance,” a type of annuity that is lower-cost because it only pays out if you beat the odds and live to age 80 or even 85.  But individuals still fear annuities because of their image as being offered by shady commission-seeking salesmen.  If the federal government is going to undertake the provision of COLA-adjusted annuities to all Social Security participants in any case, why not consider this “extended late retirement” as a way to make this work as effectively as possible?

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.