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February 23, 2005

Retirement Liberty

Kevin Drum and Will Saletan are arguing about the merits of raising the retirement age. Will says we should. Kevin responds that we shouldn't.

My question is: why is this a political issue? Yes, I know: it's a political issue because Social Security has to decide when people are eligible for benefits. But if we can take a broader perspective, it's not obvious why there should be one official, government-determined retirement age, about which pundits bicker and politicians haggle.

To see how weird it is, let's take another contemporary debate in American politics: how long should Americans work each week? Is 40 hours excessive, or do we need to work longer to meet the needs of a growing economy?

Of course, that's not a hot-button issue in America. We decide how much to work based on individual preferences and trade-offs, negotiating with our employers for mutual beneficial employment terms. In principle, we have overtime requirements after 40 hours, but most white-collar workers are exempt from this requirement, and a good many workers work part-time jobs.

Things are very different in France. There, the French legislature decides how long people are allowed to work, and those who want to work more than the proscribed work week must lobby the government for permission to do so. To American eyes, that debate is a little bit ridiculous. Most Americans, I hope, can see clearly that different people have different needs in terms of working hours, and the nation's economic institutions should be designed to permit flexibility and individual choice.

Which brings me to my point about Social Security. Right now, Social Security does allow you to retire early in exchange for reduced benefits, but the process isn't actuarily fair and the range of options is very limited. If I wanted to work until 70, I would recieve no additional credit for the extra payroll taxes I paid in between 67 (my official retirement age) and 70. That both reduces my freedom to make a tradeoff between the length and prosperity of my retirement and creates a perverse disincentive to work longer, which would increase tax revenues.

Under a system of private accounts, in contrast, workers could retire any time they liked after the minimum retirement age. In fact, one could easily envision a personal accounts system that allowed workers to retire as early as they wanted, provided they had accumulated enough assets in their accounts to finance a minimum retirement benefit. Likewise, a personal accounts system would make it a simple matter for workaholic retirees to continue working into their seventies, using the extra income to finance a comfortable retirement or leaving the larger nest egg to their kids.

Reform opponents like to scoff at the notion that there's an issue of liberty involved in the Social Security debate. But is it not obvious that a system with a one-size-fits-all retirement age (or even one that gives a narrow range of options like early retirement at 62) is a reduction of liberty compared with systems that accomodates a wide variety of choices in the work/leisure tradeoff? If the French debate over how many hours people should work is absurd, is the American debate over how many years we should work any less so?

Posted by Tim Lee at February 23, 2005 6:11 PM

Comments

Do any of the proposed plans allow a personal account holder to purchase the mandated annuity at will? Or are you unable to do even that until you hit a specified age?

Posted by: PJ Doland at February 23, 2005 9:15 PM

Under Cato's plan, you're allowed to opt out of Social Security altogether once you've accumulated sufficient assets to buy the minimum annuity. I don't think you're allowed to actually buy the annuity until your 60s, but you can start putting your 6.2% tax wherever you like, so you could start saving it for an early retirement. Sam Johnson's bill is based on the Cato plan, but I'm not sure if it includes this feature; it probably doesn't. Still, even without that feature, the Johnson bill has a much wider and more actuarily fair range of choices than the status quo.


Posted by: Tim at February 24, 2005 9:47 AM

Good point, Tim. Although most people look forward to fully retiring, many others like to continue working at least part-time. I think that one negative effect of the Social Security retirement age has been to send a signal to the culture that it's somehow wrong for people past a certain age to be working. This translates into how employers view hiring people of a certain age.

Posted by: Kevin B. O'Reilly at February 24, 2005 5:11 PM

When the retirement age is raised, there will still be early retirement available. You can early retire at 62 now, you just get paid less. (20% less now, 30% less when the normal retirement age is raised to 67)

http://www.businessweek.com/magazine/content/02_30/b3793638.htm

Raising the retirement age is just a sneaky way to lower SS benefits.


If you want to work after the normal retirement age, you still get paid the normal social security benefit, no matter how much you make. You can just save this money if you want.


http://www.ssa.gov/r&m2.htm


Posted by: joe o at February 26, 2005 3:30 AM

I don't disagree that the current Social Security retirement age has had some adverse consequences. But isn't it a bit disengenuous to use this obvious point to criticize the current system for lacking a "wide...range of choices" when the whole point of the current system is to provide a risk-free guaranteed benefit? Of course the current system reduces individual freedom. So what. It does so honestly by recognizing that we're all in this game together and that it would be prudent to hedge our bets in the face of an uncertain future. Is it so hard to believe that red-blooded American citizens don't actually have a problem with prudent collective action and sacrificing a little of their pie for the greater good.

Posted by: fnook at February 26, 2005 12:29 PM

"If I wanted to work until 70, I would recieve no additional credit for the extra payroll taxes I paid in between 67 (my official retirement age) and 70."

According to the last statemetn that SSA sent me about 2 years ago, if I retire at age 66 (the full retirement age for a person my age) I will recieve a benefit of $1,963/mo. If I wait until age 70 to begin collecting I would recieve a benefit of $2,628/mo.

Using the annuity factors from IRS Book Alef Table S(3%) for single life at age 66 of 12.2375 and age 70 of 10.6773, I get present values at those ages (without monthly adjustments) of $228K and $336K respectively.

The value differences is about actuarily fair (on my assumptions, I get a ~4% irr, YMMV) but does not credit for extra earning as you pointed out -- except that the extra years become part of your lifetime earnings for figuring out your base benefit. The plan is a defined benefit plan that considers, IIRC, your 35 highest years.

P.S. the age 62 calculations do not show a fair cutback. And shaft me to the tune of about $58/mo.

Posted by: Robert Schwartz at February 28, 2005 10:34 PM

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