University professor stipulates that the real retirement age is 70 because that’s when full Social Security benefits are paid out.
We all hear the saying and to some extent it’s true. 60’s the new 50; 50’s the new 40; 40’s the new 30 and so on. When it comes to Social Security, older Americans can choose to take their benefits at their full retirement age, which currently stands at 66. They can even opt to take a lower amount by starting at 62. But with people in better health than ever, Americans are working longer to make up for their lack of retirement savings.
By waiting until 70, older Americans also earn the highest monthly benefits. That in essence has made Social Security’s real retirement age 70, according to Alicia Munnell, a professor of management sciences at Boston College and director of the Center for Retirement Research.
When Social Security benefits were first paid in 1940, the retirement age was 65 and there weren’t any allowances to take it sooner or later. That was the age it was believed people could no longer work and needed benefits, Munnell says. That changed in 1956 when Congress allowed women to start taking reduced benefits at 62. It was extended to men five years later.
The whole concept is that no matter if a person took benefits at 62 or 65, they were expected to receive the same lifetime benefits, Munnell says.
In 1972, Congress increased it to age 72 to give those who retired later even more. That was ultimately dropped to 70 in 1983, but yearly benefits increased for those who waited by the tune of eight percent a year.
Since life expectancies have risen seven years longer today than in 1940, Munnell says that suggests “people may have outgrown the physical need for retirement at 65 that may have existed in earlier years.”
The latest figures show that 30 percent of men are employed until 70 and the trend has been increasing since 1985 and has the potential to grow, Munnell says.
Given that Social Security benefits are 57 percent for those who take them at age 70 compared to age 62, will continue to drive people to keep working and accept them later, Munnell says.
“Retiring at 62 will not be a reasonable option for those who have any ability to stay in the labor force,” Munnell says. “Those who retire at 65 will receive a benefit equal to 31 percent of pre-retirement earnings, a very modest base particularly given the extremely low balances in 401(k) plans.”
The full retirement age has moved from 65 to 66 and will reach 67 for those born in 1960 and later. Patterns show that when the full retirement age changes, people tend to work longer even though they can take benefits sooner, Munnell says.
“Working until 70 is the way for people to have an adequate benefits on which they can build for a secure retirement,” Munnell says. “The shift in age to 70 may be appropriate given the increase in life expectancy, health and education for the majority of workers,” but it will harm those who retire early and lead to lower benefits for them, she says.
“People are healthier, better educated and have less demanding jobs and can work longer,” Munnell says. “They’re also living much longer. So keeping monthly benefit levels unchanged results in ever increasing costs. But constantly reducing the benefit levels by increasing the full retirement age is very hard on those who can’t change their retirement date.”
Munnell says that if the country wants to cut benefits, it may be best to change the formula and allow for larger cuts for those who are higher earners compared to those at the bottom. Eliminating the full retirement age would clarify Social Security, she says.
“It would clearly signal that claiming at age 70 provides the appropriate benefit and would encourage people to work longer,” Munnell says. “Eliminating the concept would also force policymakers to call a cut and perhaps target reductions where they could less pain.”