Time to tweak the timing adjustments?
There are many people who don’t apply for Social Security benefits “on time” – some do it “early” and some do it “late”. There are factors to consider in both cases, and a recently published article suggests that it might be worth adjusting how these adjustments are made.
The two factors considered for early retirement and delayed retirement need to be adjusted, argues Mark J. Warshawsky, senior fellow at the American Enterprise Institute, in the working paper, “Time to Update Age Adjustment Factors in Social Security Retirement Benefits.”
The current state of things
The current full retirement age (FRA) is 67. For those born in 1960 and later, Warshawsky notes, benefit levels are based on previous earnings and are adjusted downward for younger claimants, between ages 62 and 70 for worker benefits, 62-67 for unemployment benefits. spouse and 60-67 for widowhood benefits.
Currently, the benefits of an individual who takes early retirement are reduced by 5/9 of 1% for each month, up to 36 months. If the number of months of pre-retirement exceeds 36, the benefits of the pre-retiree are further reduced by 5/12 of 1% per month, up to 60 months. On the other hand, Deferred Retirement Credits (DRC) are granted for a retirement that takes place after the FRA. The annual credit is 8% up to age 70 for people born in 1943 or later.
There are a variety of factors that complicate the timing of claims for couples, observes Warshawsky, as they can include different combinations of age, demographic groups, marital status, presence of children at expense and income. The basics, he adds, are that:
- A spouse is entitled to half the benefits of the first worker, whose adjustment factors are the same as if he were single.
- For the spouse, the percentage reduction for early retirement is 25/36 of 1% for the first 36 months before the FRA and 5/12 of 1% for each additional month up to 60 in total.
- While the principal worker’s benefit increases with deferred retirement credits after FRA, the spouse’s benefit does not.
- A spouse cannot claim Spouse’s Allowance until the primary practitioner has claimed their benefit.
As for a widow or a widower, notes Warshawsky:
- Age 60 is the earliest that he or she can start receiving Social Security benefits; they can start between this age and FRA as a survivor.
- For people born in 1962 and later, if benefits begin before FRA, benefits are reduced by 0.339% per month, up to 84 months.
- For survivors, there is no deferred retirement bonus.
- The benefit a widow or widower can receive is limited to the amount the deceased spouse would have received if still alive.
Why make adjustments?
Fairness is the ultimate reason adjustments are made when claims for Social Security benefits are made before or after the usual age, Warshawsky says.
Claiming benefits early, Warshawsky notes, lengthens the period that benefits are paid and should result in lower benefits being paid to people who apply when they are older. Failure to do so, he argues, would create: (1) a financial advantage for those who make a claim at an early age; (2) an incentive for pre-retirees not to work, and (3) financial pressure on the social security system.
The Case of the Adjustment of Adjustments
Warshawsky cites various reasons why benefit adjustments should themselves be adjusted.
He notes that several studies over the past 20 years have argued that adjustment factors “are seriously out of date.” At the very least, he says, it’s because interest and mortality rates have fallen since the rules were designed and instituted, and the rules are inconsistent across categories of beneficiaries. Further, Warshawsky notes:
- The current upper age for adjustment – 70 – no longer matches the minimum age for required distributions from retirement accounts, which was 70½ but is now 72. in which: (1) women often did not work or earned less than their husbands, (2) were younger than their husbands, and (3) male mortality was particularly high.
- Current Social Security rules were established decades ago, when real interest rates and mortality rates were significantly higher than they are today.
Warshawsky argues that for a variety of reasons—including simplicity, ease of administration, public understanding, and ease of individual planning—why, once benefits are adjusted for the claimant’s age, the actual level of Benefits should remain fixed and not change with fluctuations in interest rates and mortality rates.
One option, Warshawsky says, is to change the factors every few years. But it’s not without risk, he says, because “there would be cliffs” and it could breed dissatisfaction with missed opportunities and penalties, real or perceived.
“A strong argument can be made,” he writes, for using market interest rates to make the initial adjustment. This, he says, is because rates affect overall benefits and financial decisions, and also reflect factors affecting the government. Also, says Warshawsky, Social Security administrators’ projections of real long-term interest rates change slowly and within a narrow range, making them less useful.
Warshawsky continues that changing the factors annually with market rates would better establish actuarial fairness and better ensure that there would be no inappropriate losses or gains for individuals and the social security system itself. same. It includes the caveat that such an approach “may be too volatile” due to fluctuations in the bond market and the ability of individuals to seize the choices available. However, Warshawsky also notes that there is an annual cost-of-living adjustment to Social Security benefits that “appears to be well tolerated and understood.”
“These changes,” Warshawsky says, “can and should be put in place soon to ensure justice and fairness and the right incentives.”
Fairness is important, Warshawsky argues, and his feeling is that the system would save money as more workers delay retirement and claim benefits. And, he adds, such changes would not depend on political action. He argues that there should be a transition period if changes are instituted to accommodate those who have made plans and taken action based on current laws and practices.