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Has The Increase In Retirement Age Affected When People Cash In?

There have been some surprising results.

We all remember when, in 1983, Congress approved a gradual raise of the full retirement age for Social Security benefits from 65 to 67 – how would that, we wondered, impact the retirement of Baby Boomers?

Would it delay, for example, our retirement, even though people can still begin taking benefits at 62? (The increase from 65 to 66 decreased the benefit amount from 80 percent to 75 percent for those who take it at 62. It’s 66 for those born between 1943 and 1954, and it will increase to 67 for those born in 1960 or later.)

That will come at a price, because those who want benefits at 62 will only get 70 percent of their full benefit, and if they want it at 65 they’ll only get 86.7 percent. This was designed as a way to extend the life of the Social Security trust fund, whose full benefit amount only goes through 2033.

We already know that people are retiring later and later because they’re living longer and are healthier and more educated. They also lack the traditional pension and therefore need to save more money for retirement. And if they wait until the age of 70 to collect, they enjoy a 32 percent gain.

Yet, three quarters of people take Social Security benefits before their full retirement age, with the biggest chunk starting at 62. With an average retirement age of 64 for men and 62 for women, that’s up two years over the last two decades,

That gain has prompted economists and other researchers to take a look at how much the increase in the full retirement age is delaying retirement. Previous studies have suggested it’s having an impact, and one released this year that looks at similar reforms to what was done for Switzerland’s version of Social Security shows that’s the case.

That study of women revealed that a one-year increase in the full retirement age prompted a six-month delay in retirement.

Stefan Staubli, an assistant professor of economics at the University of Calgary and co-author of the study, says based on what they discovered in Switzerland, someone’s retirement decision appears to be responsive to changes in the full retirement age. He suggests that increasing the retirement age from 66 to 67 delays people’s retirement by at least six months. What causes it may not be the financial gains by waiting, but actually the perception of what is considered the proper retirement age, he says.

“Workers perceive the statutory full retirement age as a social norm or implicit advice from the government about when to retire and claim benefits,” Staubli says. “This claim is also supported by evidence showing that individuals’ retirement decision is far less responsive to a pure financial incentive that’s not coupled with a change in the full retirement age. However, we are exploring this question further by trying to estimate the importance of the social norm aspect relative to financial incentives.”

Staubli says Social Security benefits in the US and other industrialized countries are under financial pressure due to significant increases in life expectancy, low birth rates, and the Baby Boomers approaching retirement age.

To maintain the financial viability of Social Security, Staubli says lawmakers are going to have to make a choice between keeping benefits untouched and increasing the payroll tax, or only reducing the size of benefits. That will be discussed in future budget proposals.

“Our study can tell policy makers that if the benefit generosity is to be reduced to reduce expenditures, an increase in the full retirement age is an effective measure to achieve this goal,” Staubli says. “As people delay benefit claiming, the government has to pay less benefits on average over the lifetime of a retiree.”

What it also does, Staubli says, is generate additional social security contributions because individuals work longer.

“In the Swiss context, we find that these two forces significantly improve the financial stability of the social security program,” he says. “One concern is that individuals affected by an increase in the full retirement age will try to seek benefits from other social insurance programs, such as unemployment insurance or Social Security Disability Insurance. Our Swiss data allow us to examine whether and to what extent benefit substitution occurs. We find no significant increase in unemployment take-up, and some increase in disability benefit take-up among affected women, but the effects are small in magnitude and the reduction in government expenditures remain substantial.”

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