The year 2032 is an ominous fiscal deadline quickly approaching. It is the year the river of Social Security benefits will be officially reduced to a stream.
There have been many suggested ways over the years to widen the river bed so to speak, and allow the money to flow, but by and large, the suggested ways are politically unpopular.
Olivia Mitchell, Ph.D. is the Executive Director of the Pension Research Council and a professor at Wharton University. Mitchell and her research team have proposed quite an innovative way at looking at how to preserve Social Security's landscape, and it deserves serious consideration.
Delay Retirement Age with a Twist
The earliest age a person can begin claiming Social Security benefits is 62. The latest age a person can begin claiming the benefits is 70. Statistically, more than 1/3 of Americans are claiming these benefits as early as they can, but that puts a strain on the system.
Ironically, Social Security monthly benefits go up in value almost 77% by the end of those key eight years between 62 and 70 years old. That is a higher rate of return than any private retirement option on the market today. Even though working longer is not very appealing to many people, it may be possible to depend on other assets until that age cap is reached.
It is beneficial to both individuals and the system to delay collecting Social Security retirement benefits.
It is beneficial to both individuals and the system to delay collecting Social Security retirement benefits. Experts often recommend that people delay their retirement age, and the official retirement age has slowly crept up too.
However, Olivia Mitchell has made an innovative proposal that gives incentives to delay claiming benefits and does not harm the existing system. In this she stands out among policy advisors aiming to save Social Security.
One Large Disbursement
Mitchell has found that a large majority of surveyed people would prefer to have a lump sum payment of the benefit increase gained from ages 62 to 70. Rather than receiving the increased monthly payments, under her proposed solution, recipients of Social Security benefits could have the option to receive that increase in a lump sum. That would equate to an amount between $60,000 and $170,000. What she found was that those who were the most inclined to claim benefits at the earliest age were also the most likely to consider delaying in order to receive a one-time disbursement.
Neutral Is Better than Loss
When the river of Social Security benefits comes to its devastating narrowing, benefits will be reduced by 1/3. That means a retiree expecting to receive $1600 a month will actually be receiving around $1067. For many people that could mean they are unable to make payments on debts, mortgages, or prescriptions.
While the newly proposed approach won't help the public retirement fund's finances, it doesn't hurt it either. What it does do is provide an incentive for the recipient to continue working just a little while longer, not necessarily until 70, but even delaying claiming benefits by eight months and working four of them helps a little. With longer lengths of employment comes more payments into the system, helping to keep it solvent.
Would recipients still be inclined to take the lump sum if it was slightly less than what it is now?
There is still more research going into the proposed one large disbursement idea, including the concept of slightly reducing the benefit increase after age 62 while keeping the same contribution rate. Would recipients still be inclined to take the lump sum if it was slightly less than what it is now? If so, that could help reduce the $28 trillion shortfall the Social Security Administration is currently barreling towards.
The grisly truth is that something has to be done. By giving people more options and a greater freedom to choose for themselves based on what works best for them, change may come more easily. It may not come as quickly as it needs to, but as life expectancy continues to rise, there is a greater flexibility to the retirement age. Re-framing the Social Security dilemma in light of creating options for people rather than top down political proposals could be the paradigm shift needed to chart a better course.
Maurer, Raimond, Mitchell, Olivia S., Rogalla, Ralph, and Schimetschek, Tatjana. The Potential Effect of Offering Lump Sums in the the Social Security Program. Penn Wharton, University of Pennsylvania, Public Policy Initiative. Issue Brief (3)9. Available at http://publicpolicy.wharton.upenn.edu/issue-brief/v3n9.php. Last Visited March 1, 2016.
Wharton University of Pennsylvania. (February 25, 2016). A Novel - and Painless - Way to Bolster Social Security's Future. [email protected]. Available at http://knowledge.wharton.upenn.edu/article/a-novel-way-to-boost-the-future-of-social-security/. Last Visited March 1, 2016.