After years of fruitless discussion over how best to shore
up Social Security finances, it’s time to change the conversation. Those eager
to cut benefits keep pushing a less generous cost-of-living adjustment formula
and hiking the age for receiving full benefits. Those who want to preserve the
system advocate scrapping the cap on payroll taxes. Let’s change the
conversation to creating incentives for workers to stay employed well into the
traditional retirement years.
Many aging workers are earning a paycheck, often through
part-time work, bridge jobs, phased retirement, temp jobs, contract labor, and
starting their own business. A number of ideas have been floating around think
tanks and academic centers for years about ways to adjust Social Security to
accelerate the trend. One proposal costs nothing: Change the way we discuss
Social Security. At the moment, the emphasis is on how early you can file—age
62. Reasons are then typically given for why it pays to delay. Well, how about
starting with the age of filing for Social Security at 70? Assume you will file
at age 70 unless ill health or some other factor leads you to apply earlier.
Jingjing Chai, Raimond Maurer, and Ralph Rogalla of Goethe
University and Olivia Mitchell of the Wharton School at the University of
Pennsylvania have put forward a “nudge” concept: Allow Americans who delay
claiming Social Security to take some of their benefit as a lump-sum payout.
The scholars illustrate the effect this way. Under current
rules, workers who delay claiming Social Security until after their so-called
full retirement age are entitled to a benefit increase of about 8 percent every
year retirement is deferred, up to age 70. In their example, older workers
decide to stay on the job until age 66, rather than retire at 65, their full
retirement age. At age 66, they would get a lump sum worth 1.2 times the age 65
benefit. They would also receive the age 65 annuity stream of income for life
when filing for benefits at age 66. Those who wait until age 70 to file for
Social Security would get a lump sum worth some six times their starting-age
annual benefit payment, plus the age 65 full retirement benefit stream for
life.
The lure of the lump sum would encourage workers to stay on
the job voluntarily, by about one and a half to two years longer, on average,
the researchers calculate. Among the attractions of the lump-sum payout are
financial flexibility, the option of leaving money to heirs, and the
opportunity to invest the money, yet they would have the reassurance of a
lifetime annuity in their elder years.
Payroll tax relief is another option. The current Social
Security benefit formula is based on a calculation that takes into account a
worker’s highest 35 years of earnings. Once 35 years have been put in, the
incentive to stay on the job weakens, especially since older workers usually
take home less pay than they did in middle age, the peak earning years. Eliminating
the employee share of the Social Security tax is an immediate boost to an aging
worker’s take-home pay, and getting rid of the employer’s contribution lowers
the cost of employing older workers.
Increasingly, the key question in planning for retirement is
figuring out what you want to do next. Marc Freedman, head of the nonprofit
Encore.org, offers perhaps the most intriguing idea: Social Security could help
people invest in the next stage of their work lives. Let people tap into their
Social Security “account,” in their 50s to fund a “gap year,” a year-long
sabbatical to explore options for their next act. Their Social Security benefit
would be actuarially adjusted so that the overall effect is revenue neutral.
Frame Social Security reforms in ways that view older
workers as an economic asset. Encouraging longer work lives is good for
employees, for society, for the economy, and for Social Security. Now that’s a
fruitful conversation to have.
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