Time to Change the Conversation on Social SecurityChris Farrell
Arnold Brown, chairman of Weiner, Edrich, Brown, a trend-tracking consulting firm, was on a panel at an Employee Benefit Research Institute policy forum in Washington in late 2013. He told the story (probably apocryphal, he added) of an American general visiting the British army on the eve of World War II. The American general watched a British artillery battalion drive up in its trucks during field maneuvers. The soldiers got out of the trucks and prepared their guns for firing. The American general turned to the British officer with him and said, “I’m puzzled. You have seven men in each gun crew. But six men do all the work and the seventh just stands there at attention during the whole process. What is the function of the seventh man?”
“I really don’t know,” the British officer replied. “We have always had seven men in a gun crew. When I get back, I’ll check up on the reason why. I’ll let you know.”
The British officer called the American general the next morning. “The reason is that the seventh man holds the horses.”
The audience burst out laughing. Brown said, “We have to look at the model we have now and ask why? Why do we have it this way?”
After years of fruitless discussion over how best to shore up Social Security finances, it’s time to change the conversation. The political debate on Capitol Hill is at a stalemate. Those eager to cut benefits keep pushing a less generous cost-of-living adjustment formula and hiking the age for receiving full benefits. Those who want to preserve the system advocate scrapping the cap on payroll taxes. (Income above $117,000 in 2014 isn’t hit with Social Security tax. The limit is adjusted annually for inflation.) Let’s change the conversation to creating incentives for workers to stay employed well into the traditional retirement years. The boon to household finances and economic activity would make it far easier to pay the Social Security funding bill.
Many aging workers are earning a paycheck, often through part-time work, bridge jobs, phased retirement, temp jobs, contract labor, and starting their own business. A number of ideas have been floating around think tanks and academic centers for years about ways to adjust Social Security to accelerate the trend. One proposal costs nothing: Change the way we discuss Social Security. At the moment, the emphasis is on how early you can file—age 62. Reasons are then typically given for why it pays to delay. Well, how about starting with the age of filing for Social Security at 70? (There’s no extra benefit to waiting past age 70.) Assume you will file at age 70 unless ill health or some other factor leads you to apply earlier.(Check out “Social Security’s Real Retirement Age is 70” by Alicia Munnell, director of the Center for Retirement Research at Boston College.)
Jingjing Chai, Raimond Maurer, and Ralph Rogalla of Goethe University and Olivia Mitchell of the Wharton School at the University of Pennsylvania have put forward a “nudge” concept: Allow Americans who delay claiming Social Security to take some of their benefit as a lump-sum payout. “By (voluntarily) delaying their retirement date due to the lump sum option, workers would continue to pay Social Security payroll taxes for more years, which could help return the system to solvency via additional payroll tax collections,” the scholars write in “Exchanging Delayed Social Security Benefits for Lump Sums: Could This Incentivize Longer Work Careers?”
The scholars illustrate the effect this way. Under current rules, workers who delay claiming Social Security until after their so-called full retirement age are entitled to a benefit increase of about 8 percent every year retirement is deferred, up to age 70. In their example, older workers decide to stay on the job until age 66, rather than retire at 65, their full retirement age. At age 66, they would get a lump sum worth 1.2 times the age 65 benefit. They 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 to file for Social Security would get a lump sum worth some six times their starting-age annual benefit payment, plus the age 65 full retirement benefit stream for life.
The lure of the lump sum would encourage workers to stay on the job voluntarily, by about one and a half to two years longer, on average, the researchers calculate. Among the attractions of the lump-sum payout are financial flexibility, the option of leaving money to heirs, and the opportunity to invest the money, yet they would have the reassurance of a lifetime annuity in their elder years.
Payroll tax relief is another option. The current Social Security benefit formula is based on a calculation that takes into account a worker’s highest 35 years of earnings. Once 35 years have been put in, the incentive to stay on the job weakens, especially since older workers usually take home less pay than they did in middle age, the peak earning years. Why not declare that older workers are “paid up” for Social Security after a long work history—say, 40 years? Eliminating the employee share of the Social Security tax is an immediate boost to an aging worker’s take-home pay, and getting rid of the employer’s contribution lowers the cost of employing older workers. (You can read about the idea in “Removing the Disincentives in Social Security for Long Careers” by Gopi Shah Goda and John B. Shoven of Stanford University and Sita Nataraj Slavov of Occidental College.)
Increasingly, the key question in planning for retirement is figuring out what you want to do next. What is your encore career, your job during unretirement? Marc Freedman, head of the nonprofit Encore.org, offers perhaps the most intriguing idea: Social Security could help people invest in the next stage of their work lives. Let people tap into their Social Security “account,” say, in their 50s to fund a “gap year,” a year-long sabbatical to explore options for their next act. Their Social Security benefit would be actuarially adjusted so that the overall effect is revenue neutral. (Here’s one version of his proposal, “A Gap Year for Grown-Ups?”)
Frame Social Security reforms in ways that view older workers as an economic asset. Encouraging longer work lives is good for employees, for society, for the economy, and for Social Security. Now that’s a fruitful conversation to have.