Smart SpendingSmart Spending

Downside of a higher retirement age

Life spans have increased, but some say raising the Social Security retirement age is not fair for all seniors.

By MSN Money Partner Nov 13, 2012 6:04PM

This post comes from Philip Moeller at partner site U.S. News & World Report.

 

U.S. News & World Report logoNow that the post-election entitlements fights are back in the spotlight, raising the Social Security retirement age will return to center stage as one of the common prescriptions for closing the program's long-term funding gap.

 

Image: Social Security Card (© Scott Speakes/Corbis)Increasing or entirely lifting the ceiling on taxable wages -- set at $113,700 in 2013 -- is another frequently mentioned proposal. Further down on the list are measures to change the annual cost-of-living adjustment for Social Security recipients and restrict payments to high-income beneficiaries, as well as a slew of benefit tweaks that could have a meaningful cumulative impact on program finances.

 

Unlike the government's other big safety net programs -- Medicare and Medicaid -- Social Security is not facing imminent funding problems. With no changes at all, the program projects that it will pay all benefits for more than 20 years and would then be able to continue paying out roughly three-quarters of benefits.

 

Another misconception about Social Security is that it is floating in red ink. Actually, the program had a surplus of about $2.7 trillion in 2012. This cushion will grow further before being sapped by rising benefit payments triggered by millions of retiring baby boomers.

 

At first glance, raising the retirement age seems like a straightforward change that simply recognizes the demographic realities of aging. People are living longer than ever and are physically able to continue working into their 60s and even 70s. The economy will need more older workers because retiring boomers are being followed by a much smaller generation of workers.

 

Lastly, people will need to keep working more years for financial reasons -- to recover from the recession and to fund retirements that will last a long time.

 

Social Security is one of the ways they will boost retirement earnings, of course. Most people earn more money later in their working lives than when they were younger. So adding several years to people's Social Security earnings history is likely to boost their Social Security benefits when they do retire.

 

So what's not to like? According to a phalanx of liberal seniors groups -- foundations, think tanks, women's groups and other Social Security "preservationists" -- the longevity rationale for raising the retirement age doesn't apply to lower-income and less-educated men and, especially, women. They would get hammered by raising the retirement age. And they are precisely the group of Americans -- and a pretty big group at that -- that depends desperately on Social Security benefits for the bulk of their retirement incomes.

Here's the preservationist logic against raising the retirement age:

 

1. Social Security benefits are pegged so that a person reaching what the agency calls its "full retirement age" (FRA) is entitled to his or her full benefit. People retiring at the earliest age, which is now 62, get about 75% as much money each month from Social Security as if they had waited until their FRA -- 66 for those now approaching retirement.

 

It's also possible to defer taking Social Security until age 70, when the monthly benefit would be about 132% of what it is at age 66. This benefit structure was designed to be dollar-neutral to Social Security. Looking at longevity data and past decisions of beneficiaries, the agency figured that it will pay out the same amount of money regardless of when people elect to begin receiving benefits.

 

Raising the retirement age from 66 to 70 means that the time gap between early retirement at 62 and full retirement would be increased from four to eight years. This assumes it would still be possible to take early retirement at age 62. If the agency keeps its benefit structure in place, it no longer could afford to pay people 75% of their FRA benefit if they elected to begin receiving the benefit at age 62. Instead, that "value neutral" payment at age 62 would fall to about 57% of the full benefit.

 

2. In theory, longevity gains mean that if the FRA was raised to 70, early retirement might begin at age 66 and not 62. Raising the retirement age would thus shift everyone by four years. The system would save money by having to pay benefits for four fewer years. But individuals would not be so bad off, because they'd have worked for an extra four years and presumably boosted their retirement incomes during that period of extra work.

 

But while such longer lives are truly wonderful, they unfortunately are not being enjoyed by lower-income, less-educated people who work in physically taxing jobs. They're not living longer.

Wealthier and better-educated people, on balance, follow healthier lifestyles, seek out medical care and follow their doctors' advice in taking medications and related therapies for health problems.

 

3. Lower-income people often are not able to extend their working lives another four years. Many work in physically demanding jobs, and their bodies have worn out by the time they enter their 60s. People who retire at age 62 today tend to work in these low-income, physically demanding jobs. For them, early retirement is not a luxury but a forced necessity.

 

4. Raising the retirement age will thus sharply cut benefits of people who are still forced to seek early retirement. And these folks often have little set aside in the way of a retirement nest egg. Social Security benefits thus represent a very large percentage of their retirement incomes. Cutting those benefits, preservationists argue, is thus punitive as well as heartless.

 

More on U.S. News & World Report and MSN Money:

452Comments
Nov 14, 2012 12:47PM
avatar
blame everything on baby boomers and not the illegals that get everything instantly for free !!!!!
Nov 14, 2012 12:45PM
avatar

I wrote this in response to a comment but it seems like it hasn't gotten up to everyone, so let's try again.

 

First off, let's get a few things straight. I'm really tired of the same old arguements coming up. If you are going to give an opinion on this stuff, at least have the correct data...

1.Myth: Members of Congress do not pay Social Security taxes.

Reality: Prior to 1984, neither federal civil service workers nor Members of Congress paid taxes to Social Security, nor were they eligible for Social Security

Members of Congress and other federal employees were instead covered by a separate pension plan called the Civil Service Retirement System (CSRS). However, the 1983 amendments to the Social Security Act (P.L. 98-21) required federal employees first hired after 1983 to participate in Social Security.

These amendments also required all Members of Congress to participate in Social Security as of January 1, 1984, regardless of when they first entered Congress. Thus, since then, all Members of Congress have paid, and continue to pay, Social Security taxes.


1.Myth: Members of Congress can retire and receive their full salary after serving just a single, two-year term.

Reality: This information is simply false.

Under current congressional retirement plans, Members of Congress are eligible for a pension at age 62 if they have completed at least five years of service. Members are eligible for a pension at age 50 if they have completed 20 years, or at any age after completing 25 years of service.

The amount of the pension depends on the number of years of service and the average of the highest three years of salary. By law, the starting amount of a Member's retirement annuity may not exceed 80% of his or her final salary.

In 2007 (the latest data available), the average annual pension for a Member of Congress was $36,732 for serving an average of 16 years. []

Nov 14, 2012 12:42PM
avatar
Inflation adjust the FICA cap and we have no further issues with Social Security.  It's that simple.
Nov 14, 2012 12:39PM
avatar

I am so tired of the fair share, the evil rich and other petty, childish "argument". The more people make the more they pay already (fact), yes there are a bunch of stupid loopholes. So let's stop spending money and an astronomical amount of man hours with the tax code. Make the tax code a 100 page document and let's move on with our lives and solve systemic issues. Spending is steadily rising as a portion of GDP so let's stop looking for personel or funding solution.....we have been doing that for a very long time now under BOTH parties, so trying the same type of "solution" is by definition INSANITY!!!!

Nov 14, 2012 12:26PM
avatar
Raising the age is okay...the GOP better not cut ANY benefits for seniors...or that party will go away. Members need to recognize the vast majority of VOTERS favor taxing the rich who have gotten richer...and tell Grover the tax pledge was made in a different time before the voters spoke. It's better that Grover go away than the GOP.
Nov 14, 2012 12:17PM
avatar
I've never understood why there is a cap on the social security contribution, currently just over the first $100K of income.  The whole idea behind SS is to provide a safety net, so people who have worked all their lives can finish out their years with some security.  If you have a ball player or a derivatives trader who makes $40 million a year, why should they not pay into the system on the same percentage basis as some guy who actually works for a living making $60K?  The derivatives trader (one made l$4 BILLION a couple years ago) is taxed at 15% and does not have to pay into SS because it's not earned income!  It's time for the mega-rich to start paying their fare share.  If you haven't noticed, they have been accumulating immense wealth while working people ( the middle class) have been trying to just stay even.
Nov 14, 2012 12:16PM
avatar
STOP with the WHINING!!!!!  Play the cards you are dealt and , , , suck-it-in!!!  Enough with the belly aching. 
Nov 14, 2012 12:16PM
avatar
Fixing Social Security is simple.  I believewhen you make 90,000 or 100,000 you don't pay into i any more ,  well take that away and make everyone pay into all year long. You will have so much money in there they won't know what to do with it.  Raising the age only hurts the little guy.  The rich don't need social security so they don't get hurt from raising the age.  But you help them by putting a cap of what you can pay into it by there salary.   FIX IT TAKE THE CAP OFF OF IT.
Nov 14, 2012 12:16PM
avatar
If we have to work till we die, what's the point of SS?  You youngn's better start your own SS, keep the government out of it!!
Nov 14, 2012 12:10PM
avatar
SS was not designed to be the majority of someones retirement income.  I know that some people cannot save to supplement their retirement but that does not mean the program has to accommodate the few to the detriment of the many. 
Nov 14, 2012 12:07PM
avatar

Interesting that these "liberal" groups are crying about the possible raising of the retirement age.  I bet their solution is to TAX, TAX, and TAX some more on the rest of us. 

Nov 14, 2012 12:05PM
avatar
They can save a lot by cracking down on people getting social security because of a "disability." Do you know how easy it is to get that? It is SO abused.  
Nov 14, 2012 12:04PM
avatar

First off, let's get a few things straight.  I'm really tired of the same old arguements coming up.  If you are going to give an opinion on this stuff, at least have the correct data...

 

1.Myth: Members of Congress do not pay Social Security taxes.

Reality: Prior to 1984, neither federal civil service workers nor Members of Congress paid taxes to Social Security, nor were they eligible for Social Security

Members of Congress and other federal employees were instead covered by a separate pension plan called the Civil Service Retirement System (CSRS). However, the 1983 amendments to the Social Security Act (P.L. 98-21) required federal employees first hired after 1983 to participate in Social Security.

These amendments also required all Members of Congress to participate in Social Security as of January 1, 1984, regardless of when they first entered Congress. Thus, since then, all Members of Congress have paid, and continue to pay, Social Security taxes.


1.Myth: Members of Congress can retire and receive their full salary after serving just a single, two-year term.

Reality: This information is simply false.

Under current congressional retirement plans, Members of Congress are eligible for a pension at age 62 if they have completed at least five years of service. Members are eligible for a pension at age 50 if they have completed 20 years, or at any age after completing 25 years of service.

The amount of the pension depends on the number of years of service and the average of the highest three years of salary. By law, the starting amount of a Member's retirement annuity may not exceed 80% of his or her final salary.

In 2007 (the latest data available), the average annual pension for a Member of Congress was $36,732 for serving an average of 16 years. []

Nov 14, 2012 11:55AM
avatar

Not all government employees are paid high wages.  Not all government employees can retire with health care covered.  Perhaps State and Federal employees do, but when you are talking city and town government employees many are in the same boat as everyone else.

Nov 14, 2012 11:53AM
avatar
I was under the assumption that an exemption is suggested for those that can prove they were in this type of profession for the bulk of their careers.  We shouldn't throw out a savings plan entirely before trying to work something out for those few that are the exceptions.  Most of them are from Mexico anyway.  And perish if they knew ahead of time they would need to preserve themselves an additional 4 yrs they will take better care of themselves.
Nov 14, 2012 11:44AM
avatar

I have worked since the age of 14 and have paid taxes since 14.  I still have years to work to get to the magic number of 65 and now the so called government leaders or so called experts believe 67 or 70 should be retirement age.  The so called leaders that run our government  need to stop paying $20,000 for a hammer, $30,000 for a toilet seat ( I borrowed that from Independence Day)  The govenmnent needs to  stop giving people benefits that never paid any taxes.   The government needs to  put a lot more effort into stopping illegal immigration.   If the work for welfare program would be reinstated our country would be in a lot better shape financially and the people that worked hard throughout their lives would have something to retire on.

Nov 14, 2012 11:39AM
avatar
A lot of longevity also depends on genetics; if your parents died young, no matter how well you take care of yourself, you have a strike against you. I am more in favor of blowing the cap on taxable earnings, which was not a very bright idea to begin with. It was put in place, why? To give the wealthy an incentive to support the program? Boy, am I tired of that rationale...
Nov 14, 2012 11:34AM
avatar

"Most people earn more money later in their working lives than when they were younger. So adding several years to people's Social Security earnings history is likely to boost their Social Security benefits when they do retire."

 

That is old fashioned way of thinking. In today's business environment, Maturity and wisdom in not valued anymore. A younger worker is now deemed more valuable, because they are cheaper. I work in the IT field, and am approaching Middle Age. My strategy is to keep extremely current on emerging technologies, more so than my younger predecessors, to maintain my value in the industry! 

Nov 14, 2012 11:34AM
avatar
I really wish i could work longer(i'm 66) but my business is SO bad, it's ridiculous to go on.
Nov 14, 2012 11:31AM
avatar

I have one of those back breaking low level food service jobs; after 23 years of owning a business (which went the way of the economy in 2010) and due to the amount of self-employment taxes paid every year, I don't have a nest egg. I have the experience and I have to compete with 20-30 somethings for jobs; I can't even get to the interview process at my age. How is it I'm suppose to get back into my field of experience, stay there until I'am 70; when I can't even get to the interview process. My chances of working until I'm 70 are next to nothing, and my current job will break me down so much, that early retirement may be all that I have.

In closing a man my age has a better chance of competing with the 20-30 somethings than I do. But, all of the Boomer' face the same situation if they are in "GRUNT" work America.

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

VIDEO ON MSN MONEY

TOOLS

More