Social Security is O.K.. Yes, “O.K.” is hardly an exuberant term. Nevertheless, considering the apocalyptic language hurled at the social insurance program in recent years—Ponzi scheme, monstrous lie, imminent bankruptcy—it’s a reassuring judgment.
The 2013 Social Security and Medicare Trustees Report, released on May 31, shows the system’s finances essentially unchanged from last year’s projections. Social Security’s retirement and disability programs have sufficient resources to cover promised benefits for the next 20 years, with the expected date of trust fund exhaustion in 2033. There will still be enough revenue after that date to pay about 75 percent of scheduled benefits. That’s hardly a desirable outcome, of course, but it reinforces the critical take-away that Social Security isn’t a basket case. (The Trustees report has Medicare improving its financial health and able to pay its bills through 2026, two years longer than last year’s guesstimate.)
Fundamentally, Social Security is sound. The system needs some tweaks to shore up its finances over the long haul. The sooner the shortfall is addressed, the better, because Social Security is the foundation of the American retirement system. Two thirds of senior households rely on Social Security for a majority of their income. Specifically, 65.3 percent of those 65 and older get half or more of their income from Social Security. More than a third of the same age group—36.3 percent—receive 90 percent or more of their income from their monthly Social Security checks. Unfortunately, too much of the fight over how best to improve Social Security’s finances has focused on reducing benefits, which aren’t lush. The average monthly benefit for retired workers? A mere $1,266.81.
Speaking of retirement, most aging workers realize they will have to keep earning money well into the traditional retirement years. It’s a message America’s fiftysomethings have absorbed after two bear markets and two recessions in less than a decade upended retirement planning expectations. Earning even a slim, part-time income for a few extra years can pay off big. So instead of focusing on lowering Social Security benefits, what about reforming Social Security with an eye toward rewarding people for earning a W2 or 1099 longer? “What additional incentives would make it practical and desirable for more people to work longer?” says Art Rolnick, economist and co-director for the Human Capital Research Collaborative at the University of Minnesota. “Think about incentives to keep the human capital in the workforce.”
Here’s an intriguing proposal: Offer older workers the option of a lump sum payment for delaying retirement. The lure of the lump sum would encourage workers to voluntarily stay on the job. Benefits wouldn’t be cut and Social Security’s finances would essentially stay the same.
The basic idea is simple. The earliest workers can file for Social Security is age 62, but the rewards for waiting to file are considerable. The current return for waiting to collect Social Security shows up in an improved lifetime annuity payment. What if the extra income boost came in a lump sum payment rather than an annuity? That’s the question pursued by Jingjing Chai, Raimond Maurer, and Ralph Rogalla of Goethe University and Olivia Mitchell of the Wharton School at the University of Pennsylvania. In Exchanging Delayed Social Security Benefits for Lump Sums: Could This Incentivize Longer Work Careers?
For example, a worker who delays claiming the benefit until after the Normal Retirement Age could be entitled to a benefit increase of about 8 percent every year retirement is deferred, up to age 70. In their example, a worker decides to stay on the job until age 66, rather than retire at age 65. At age 66, he or she would get a lump sum worth 1.2 times the age-65 benefit and would also receive the age-65 annuity stream of income for life when filing for benefits at age 66. Those who wait until age 70 would get a lump sum worth some six times their starting-age annual benefit payment, plus the age-65 benefit stream for life. People like lump sum payouts (PDF) for a variety of reasons, including financial flexibility, the option of leaving money to heirs, an—for “financially sophisticated individuals”—the opportunity to invest the money in stocks.
On average, the scholars calculate the lump sum option would encourage workers to delay retirement by 1.5 to 2 years.
Try this one: payroll tax relief. The current benefit formula calculation rewards people for putting additional years on the job until they hit the 35-year mark. However, once 35 years are reached, there’s no additional incentive to stay on the job. The payout formula is unlikely to improve by working longer, either, since a majority of older workers take home less than they did during their peak earning years. Why not declare that older workers are “paid up” after a certain number of years—say, 40 years of contributions?
One option is to eliminate the employee share of the payroll tax, an immediate boost to an aging worker’s after-tax pay. A more aggressive approach would be to get rid of the employer’s contribution too, lowering the cost for companies to keep and hire older workers. (A version is proposed in Removing the Disincentives in Social Security for Long Careers (PDF) by John Shoven and Gopi Shah Goda of Stanford University and Nataraj Slavov of Occidental College. “It’s an incentive for people to work longer,” says Richard Burkhauser, professor of policy analysis at Cornell University.
Depending on the details, the paid-up break could affect Social Security’s solvency. The nick in finances could be dealt in a number of ways. Meanwhile, the economy would gain from higher labor force participation rates of older workers and an aging workforce would enjoy improving finances—not a bad trade-off.
Surveys routinely show that aging boomers want to keep working, although it isn’t always easy to do. Building greater incentives into Social Security to encourage longer work lives would help transform that wish into reality.
