If the retirement age is increased, it won't help solve the retirement problem — in fact, what it will do is put low-wage earners who retire early at higher risk of poverty.
That's according to an opinion piece on Marketwatch by Alicia H. Munnell, director of the Center for Retirement Research at Boston College.
Although Munnell says that "[p]roposals to increase Social Security's retirement age are beginning to resurface" and being presented as a practical outcome of an increased life span—after all, if people are living longer, why shouldn't they work longer?—the plan is flawed in that "the retirement age has little to do with how long people work, and a lot to do with how much money they get. Increasing the retirement age is a benefit cut."
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And the people who will suffer most from that benefit cut are those who are already in the low end of the pay spectrum who end up retiring early.
The full retirement age (FRA) for Social Security, under current law, is transitioning from 65 to 67, Munnell explains, and so that lifetime benefits for the average worker are kept "roughly constant," people who claim benefits earlier than their FRA receive an actuarially reduced benefit.
Those who work later than their FRA, on the other hand, receive an actuarially increased benefit.
So someone whose FRA is 66 would receive a 100 percent benefit at 66, but just 75 percent of the benefit if instead they retire at 62—and if they wait till age 70 to claim benefits, they'll end up with 132 percent of what they would have gotten at 66.
For those whose FRA is 67, the comparable benefit amounts are 100 percent at age 67, 70 percent at age 62 and 124 percent at age 70.
Munnell points out, "So as the FRA rises from 66 to 67, the worker retiring at 62 sees his monthly benefit cut from 75 percent to 70 percent of the full benefit. The worker who increases his retirement age from 66 to 67 sees no cut in the monthly benefit but receives benefits for one less year, reducing his lifetime benefit. So raising the FRA is a cut in benefits either way."
People on the low end of the pay scale, she adds, are particularly affected by the increases in FRA, since they are more likely to retire early.
And while the tie to education level isn't "a perfect proxy for lifetime earnings," the two are highly correlated.
Reviewing data on labor force participation rates for those with a high school diploma or less (approximately the bottom third in pay), those with some college but no four-year degree (the middle third) and those with a four-year degree (the top and most prosperous third) indicates that the average low earner is also on the low end of the scale when it comes to Social Security benefits.
If the average retirement age, the report says, is defined as the age at which half the group is still in the labor force, then the average retirement age is about 62 for the low earners, 64 for the middle earners and 66 for the top third.
"And the average low earner," says Munnell, "who is unlikely to be covered by any type of employer-provided retirement plan—will receive a benefit of $8,536 (38.8 percent x $22,000) in today's dollars once the FRA goes to 67." And that's "on average much less than … advertised" by Social Security.
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