The High Price of Social Security's Early Retirement Option

Plus, why we need to raise taxes By Yuval Rosenberg and Michael Rainey The Unintended Consequence of Letting Workers Take Social Security at Age 62 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 — and 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, those tradeoffs are a political matter. So Much for ‘Tax Reform’? For years, economists and tax experts have found a broad consensus around the idea that the U.S. tax code needed to be cleaned up. Tax reform, in Washington parlance, generally meant an overall reduction in tax rates paired with the much more difficult task of “broadening the base” by eliminating deductions and closing loopholes. But in a report ([PDF]( published Friday, the Joint Committee on Taxation found that the code actually contains [more tax expenditures]( now than it did before Republicans passed their tax overhaul. By [Politico’s count]( the JCT report includes 17 new tax breaks created by the Republican law, nine that were repealed by it and 55 that were altered. [Scott Greenberg]( of the Tax Foundation points out that, in the wake of the GOP’s law, three of the biggest and most popular tax deductions are now expected to cost the federal government significantly less than they did in estimates produced before the tax law passed. But in total, the annual cost of all the tax breaks in the code decreased only slightly, from $1.6 trillion last year to $1.5 trillion this year, according to Marc Goldwein of the Committee for a Responsible Federal Budget, though the year-over-year comparisons can get complicated (see this [Twitter thread](. Chart of the Day From Deutsche Bank: Why Republican Tax Cuts Are a Problem, Part 1 [The Washington Post’s Jared Bernstein]( argues that the United States’ main fiscal problem can be boiled down to this: “our tax structure does not collect enough revenue to support the government people need and want.” Bernstein says that annual federal revenues as a share of GDP are about 2 percentage points ($400 billion) below where they should be at this stage of the economic cycle. He also points to an analysis by Bobby Kogan, a Democratic staffer for the Senate Budget Committee, that found that if the U.S. had kept the Clinton-era tax code while still spending as it did over the last 20 years or so, the country’s debt-to-GDP ratio would be about a third lower than it is today — about 50 percent instead of 77 percent. Why Republican Tax Cuts Are a Problem, Part 2 Also at the Post, Jennifer Rubin highlights a [new report]( from the Economic Innovation Group that finds that the country’s most prosperous communities are rapidly leaving the rest of the country behind. [Rubin]( The majority of GOP officeholders, along with many conservative think-tankers and pundits, continue to cling to 1980s economic policy, however ill-attuned to 21st-century America. They insist that lowering top marginal tax rates on the rich is the key to economic success, forgetting that the top marginal tax rate is already about half of what it was before President Ronald Reagan’s tax cuts (70 percent) and ignoring the huge geographic gaps in wealth and productivity. Cutting top marginal tax rates might give a momentary boost to the economy and help the rich get richer, but it does nothing to address the staggering geographic divide between aging, poorer rural America and richer urban America. Not only do the vast majority of struggling, non-college-educated Americans in rural areas pay little federal income tax (and hence benefit minimally from cuts in federal income tax rates), but they have real needs for which supply-side economic theory has no effective response. Quote of the Day “Democrats have put ourselves at a longtime, strategic disadvantage. We have to pay for progressive priorities, and they borrow money for theirs. After the tax cut, there’s almost no enthusiasm for worrying about how to pay for new proposals.” — Sen. Brian Schatz (D-HI), in a [Washington Post]( piece highlighting some Democrats’ “revised thinking” regarding paying for spending on proposed government programs covering health care, college tuition, infrastructure and a job guarantee. Welcome back from your Memorial Day weekend! Fun fact: Today would have been President John F. Kennedy's 101st birthday. Drop us a line anytime by emailing yrosenberg@thefiscaltimes.com. 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