AM: I don’t think we need to increase the age very much. As noted earlier, Social Security’s full benefit retirement age is already scheduled to rise to sixty-seven. Raising it to age seventy is such an unnecessary and extreme position. It’s more than needs to be done. Instead, indexing it to reflect increases in life expectancy would probably make sense. It would encourage people to stay in the workforce longer. The way to insure a secure retirement is to get as big a monthly benefit from Social Security as possible. Work isn’t all bad. It gives people a sense of purpose and a structure to their day. But something needs to be in place to catch those who cannot work longer.
TL: What would that be?
AM: If we raise the early retirement age, we need to have a disability benefits system with relaxed criteria. It needs to be flexible. The core principle is to allow those who can no longer work sufficient income to avoid impoverishment.
TL: Then does the age for collecting early retirement benefits also have to increase?
AM: We would also have to raise the eligibility age for taking benefits early so people don’t end up with miniscule income. If the age were raised to seventy, the reduction at sixty-two would be substantial. Someone born after 1959 when the normal retirement age hits sixty-seven is already scheduled to lose thirty percent of their full benefit.
TL: How much of a reduction will someone taking benefits at age sixty-two face if the normal age is raised to seventy?
AM: Based on the current rate of reductions for those claiming early benefits, the reduction would likely be near fifty percent.
TL: Is anyone talking about raising the early retirement age?
AM: No. But the two have to be coupled together.
TL: Social Security has been credited with moving large numbers of seniors out of poverty. If the age for full benefits is raised and the one for early retirement is not, won’t that wipe out the gains in income Social Security has brought?
AM: It wouldn’t wipe out all the gains, but it would significantly reduce Social Security’s ability to help ensure adequate retirement income. And even today we still see pockets of poverty among widows. A couple may start with an early benefit which the husband takes at sixty-two and when the husband dies, the wife gets only fifty percent of her husband’s benefit (or her own if it’s larger, but it often isn’t). That makes the benefit even more inadequate. The husband’s pension, if he had one, usually disappears. When that happens, Social Security is all she has. If the normal retirement age goes much higher, a woman in this situation will see a big decline in her household benefit and won’t have enough to live on.
TL: That brings up the matter of how much money do families need to live on in retirement. What’s the target people should be aiming for?
AM: In general, people need about seventy percent or what they lived on before they retired.
TL: How much of pre-retirement income is Social Security intended to replace?
AM: Let’s consider people in the middle of the income distribution with a pre-retirement income of around $45,000. For someone retiring right now, it will replace about forty percent of that income.
TL: Isn’t the replacement rate going to go down, meaning that Social Security will replace less income?
AM: Yes, when the changes mandated by the 1983 amendments gradually increasing the retirement age to sixty-seven are fully in effect, beneficiaries can expect Social Security to replace less of their income. For workers in the middle of the income distribution, it will replace thirty-six percent.
TL: If the retirement age were increased to seventy, what would the replacement rate be for those workers?
AM: About thirty percent.
TL: Won’t people be at even greater risk of not having enough income?
AM: Yes. The National Retirement Risk Index published by the Center measures the percentage of working age households who, at retirement, are at risk for not maintaining their pre-retirement standard of living. Using a lot of conservative assumptions, we found that based on 2004 data, 43 percent of households were at risk. After the stock market crash and the economic collapse two years ago, 51 percent were. That’s an extraordinarily high number.
TL: Social Security was always considered one leg of the three-legged stool of retirement income. Can people count on help from the other two legs—private pensions and personal savings?