At last week's White House economic conference, there was considerable discussion of the need to reform Social Security. The primary reasons given were to improve fairness for younger workers and put the system on a sound financial footing. As important as these things are, however, I think there is an even more important reason to reform Social Security, and that is to keep older workers in the labor force.
The problem is that the first baby boomers turn 62 in 2008. At this age, one becomes eligible for early retirement under Social Security and can begin drawing benefits. Historically, benefits at age 62 were 20 percent less than those available at age 65, the full retirement age. To be actuarially fair, these benefits should have been less. As a consequence of the over-generousness of early retirement, far too many people took it.
In 1960, when early retirement was introduced, just 10 percent of workers retired at age 62. Another eight percent retired before age 65, with 35 percent retiring at age 65 and 47 percent retiring later. By contrast, in 2002, 56 percent of workers retired at age 62 and another 23 percent retired before age 65. Only 21 percent waited until at least the normal retirement age. As a consequence, the average age of retirement has fallen from 66.2 in 1960 to 63.6 in 2002.
Over this same period, the life expectancy has risen sharply. In 1960, a 65-year-old male could expect to live another 13.2 years and a female could expect 17.4 years. By 2003, a man of 65 could expect an additional 16.7 years of life and a woman that age could anticipate 19.5 years. Thus people have been retiring earlier even as they are living longer.
The trends toward earlier retirement and longer life mean that people are condemning themselves to a lower standard of living in old age than they would have if they had waited a couple of years to begin drawing Social Security benefits. I think some people may not even realize the lower benefits they get at age 62 last a lifetime. They may be under the erroneous belief that their benefits will be bumped up at age 65. They won't.
In future years, early retirees will be getting an even worse deal. Benefits as a share of what's called the primary insurance amount is being phased down from 80 percent for those born before 1938 to just 70 percent for those born in 1960 or later. That is, those retiring at 62 will get 30 percent less than those who wait for the normal retirement age.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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