Higher Social Security Benefits for Lower Income Workers

Quick! Name a little-known industry that has blossomed over the last 20 years.

No, you can’t say “the internet.” It’s not little known.

Stumped?

Here’s my entry: the Social Security benefit claiming industry.

Yup, it’s a real industry. Thousands of financial planners offer an intricate service. They help us pick the best, most profitable time to start taking Social Security benefits. An army of software developers provides support.

The best age to claim Social Security benefits

The best time for most people to take benefits remains ASAP because they have no savings. For others, it’s a different matter. The beginning of the Age of Low Interest Rates boosted the importance of when we start taking Social Security benefits. It encouraged us to defer.

Why?

It was simple, really. As interest rates declined, the value of spending your money as a way to defer taking benefits rose. You traded money that earned next to nothing for an increase in your lifetime benefit. And the benefit was inflation-adjusted every year. I have pointed this out in many columns. Deferring Social Security benefits for a year by spending some of your savings is like buying an inflation-adjusted life annuity. With a yield of about 8 percent.

Nothing can compete with defering Social Security benefits.

Stunning.

You can’t duplicate that with any life annuity products. Indeed, you can’t come close.

It’s a classic arbitrage. You take money in one market (conventional saving). And put it in another (Social Security benefits).

Now a study from the Boston College Center for Retirement Research examines the results of our claiming decisions. It makes some suggestions about future changes in benefits. It’s also important to note two of the study authors: Andrew G. Biggs and Alicia H. Munnell.

Biggs is a resident scholar at the American Enterprise Institute. Many see it as a free-market think tank. (You’ve read about him here.)  I’ve followed Munnell’s research since she was head of research for the Federal Reserve Bank of Boston. She’s a fastidious, encyclopedic researcher. She has a strong penchant for protecting people from the free markets. Like the ones Biggs usually advocates. That they worked together is a sign this is research we should heed.

What two very different, well-respected researchers found

So, what does their examination of our choices for early or delayed benefits tell us?  Here are their main findings:

• Lower-income workers tend to claim benefits early at age 62. They claim too early even though their lower life expectancy makes early claiming a reasonable idea.
• Higher-income workers also tend to claim benefits too early. They leave money on the table due to their higher life expectancy. The study also notes something surprising. Of all workers in the highest quintile of earnings, 37 percent take Social Security at 62.  That’s way too early.
• Early claiming by workers of all incomes is, in effect, a moneymaker for Social Security. It saves the system an estimated $1.9 billion a year. Most of that saving is traced to the people who take benefits at age 62.
• Lower interest rates suggest that early claiming shouldn’t be penalized as much as it is, and delayed claiming shouldn’t be rewarded as much as it is. In other words, benefits should be higher at 62 and lower than scheduled if you wait to age 70. Specifically, they suggest a 10.7 percent increase in benefits for those claiming at 62 and a 3.3 percent decrease in benefits for those claiming at 70. (See table below.)

More than small potatoes

All of this may seem like small potatoes in our new Covid World of lower life expectancies and unimaginable government deficits.

But it’s not.

We can count on Social Security benefits being a major topic in Washington for the next four years, at least.

All of us need to keep one thing in mind. In the struggle over the distribution of wealth, one of the least disruptive ways to defuse the conflict will be to increase the virtual wealth of lower-income workers. That means increasing Social Security benefits, particularly for workers with below-average earnings.

Stay tuned.

Related columns:

Scott Burns, “Virtual wealth levels the playing field… some,” 2/13/2021  https://scottburns.com/virtual-wealth-levels-the-playing-field-some/

Scott Burns, “The Amazing Value of Social Security Benefits,” 5/23/2020 https://scottburns.com/the-amazing-value-of-social-security-benefits/

Scott Burns, “Lower wage workers also likely to lose in Social Security reform,” 1/8/2017  https://scottburns.com/lower-wage-workers-also-likely-to-lose-in-social-security-reform-2/

Scott Burns, “The Thinness of Wealth,” 5/24/2015  https://scottburns.com/the-thinness-of-wealth/

Scott Burns, “If retirement is so terrible, where are the riots?”, 8/17/2014  https://scottburns.com/if-retirement-is-so-terrible-where-are-the-riots/

Scott Burns, “The Incredible Importance of Social Security,” 9/8/2013 https://scottburns.com/the-incredible-importance-of-social-security/

Scott Burns, “Fine-Tuning the Social Security benefits decision,” 1/29/2006  https://scottburns.com/fine-tuning-the-social-security-benefits-decision/

Sources and References:

Andrew G. Biggs, Anqi Chen and Alicia Munnell, “The Consequences of Current Benefit Adjustments for Early and Delayed Claiming, 1/2021  https://crr.bc.edu/working-papers/the-consequences-of-current-benefit-adjustments-for-early-and-delayed-claiming/

Federal Reserve website, “distribution of Household Wealth in the U.S. since 1989. https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/#quarter:124;series:Net%20worth;demographic:networth;population:1,3,5,7;units:shares

This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

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(c) Scott Burns, 2021