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Why You Should Retire Early
Commentary on the News
Tuesday, January 17, 2012
Ed DeShields

Want to fix social security?  Retire early.

If you’ve thought about your retirement years lately you’ve likely had concerns about whether your social security benefits will be there when you reach age 65.  There’s a pretty good case to make that, for some, retirement isn’t going to feel much like a Jimmy Buffet “Cheeseburger in Paradise” moment. 

Retiring at age 65 with full benefits is officially known as your Full Retirement Age or FRA.  However, a lot of Americans decide to take a slightly-less-per-month benefit and retire early, at age 62.

There is a lot of speculation that your FRA and your early retirement age will increase to 67, or older, in an effort to provide for a more financially-secure social security system down the road.  After all, we’re now living longer according to our population’s demographics. 

But, is the conventional wisdom of retirement at age 62-65 actually the ideal age? 

Not according to a recent Congressional Budget Office report on the consequences of increasing the early retirement age.  In fact, a case can be made for lowering the minimum retirement age from 62 to 60.  

Could this be a “Cheeseburger in Paradise” moment?

Conventional thinking says that increasing early retirement age would lower the cost to the government in the short term because people would have to wait until they were older to apply for Social Security benefits.  But, that can be misleading.

It sounds so simple. But why doesn’t it work?

The answer is that increasing the age to retire early won’t improve the finances of Social Security (or the country as a whole). Social Security discounts the amount payable if you elect early retirement. This is so because Social Security is “expense neutral” if benefits are taken at today’s early retirement age of 62 versus the higher benefits available by waiting until 65 years.

The following formulas shows how this works:

Case #1
Benefits payable at age 62 = $1,000 per month
Average Life / (years of benefits) = 78 / (16 years)
Total life time benefits = $192,000

Case #2
Benefits payable at age 65 = $1,142
Average Life / (years of benefits) = 78 / (14 years)
Total life time benefits = $191,856

The formula that Social Security uses to discount benefits is quite simple:

The reductions are based on the month of claiming: A benefit is reduced by 5/9 of 1 percent for each of the first 36 months before your FRA of 65.

For example, if a man was expecting a monthly check of $1,000 at 65, he would receive $810 monthly if they took benefits three years earlier at 62.  Thus there is no economic consequence to Social Security (or to the overall fiscal position of the US) from retiring early.

Now consider what would happen if retiring early were to be lowered from age 62 to 60 years.

Using the same 5/9th% monthly discount rate, the individual who seeks benefits at age 60 would get a check 13% less than what he would have received by waiting until he was 62 to quit working.

Using the formula from above:

Case #3
Benefits payable at age 62 = $1,000 per month
Benefits payable at age 60 = $870 per month
Average life (years of benefits) = 78 / (16)
Life time benefits = $188,000

About the same conclusion.  Even though the $188,000 is only a slightly lower lifetime benefit, it does not take into consideration the time value of money and changes in payments of Disability Benefits. When these factors are built into the equation the numbers between the various ages of retirement are about equal.

Today, approximately 60% of retirees get their Social Security checks at age 62 (EEA). It’s hard to say how many people might want to retire 5 years earlier, at age 60, but I bet it’s a big number. 

Of the 3.6 million individuals who will get new SS benefits this year, 2.2 million (60% of total) will be getting their checks early. If the EEA were lowered to age 60 even more would benefit -- about 4.4 million people would become eligible.

What would this do for the economy?

First, it would quickly shrink the supply of available workers.  As older workers leave the workforce earlier, the demand for younger workers would increase where the unemployment rate is closer to 15-20%. People at all ages (including older workers not seeking to retire) would “move up the ladder” faster.

The CBO says that lowering the EEA would be neutral to the long-term finances of both Social Security and the country.  It would also open up a few million jobs.

And that’s just what we need.  Pass the cheeseburger please.

About Ed DeShields

Last article: 2012.  The Road to Augmented Reality

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