And here’s another Social Security proposal from Alstott that might make you sit up in your chair: The government should repeal the Social Security spousal benefit. (Under current law, with the spousal benefit, if you’re married, you may be able to get Social Security benefits equal to as much as half your spouse’s Full Retirement Account.) Alstott calls the spousal benefit “an artifact of family life in the mid-twentieth century, when most wives did not work out of the home.”
Matching Social Security to the Third Age
You may find Alstott’s ideas disconcerting. But what makes her book so important is that it addresses the reality that Americans in the aggregate are living longer, healthier lives than in the past. She uses the catchphrase Third Age (I prefer unretirement). Alstott rightly maintains that the Third Age phenomenon calls for putting the ability to work at the core of any Social Security reforms.
“As a matter of justice over the life cycle, the [Social Security] program engages in too much redistribution from younger to older workers, compared with the ideal program, which would link payouts to work disability,” she writes. “A reorientation of Social Security to focus on work disability is consistent with the program’s original mission.”
Her four guiding principles are: take life-cycle justice into account when considering Social Security policy design; the intergenerational benefits and obligations of social reciprocity; the state recognition of cumulative disadvantage from multiple inequalities that burden low earners and preserving individual dignity. I particularly found her insights about intergenerational reciprocity refreshing at a time when so many commentators are stoking intergenerational rivalry.
Why She Favors 76 as the Retirement Age
Here’s why Alstott thinks 76 should be the Full Retirement Age for Social Security. The current formula imposes the same percentage lifetime penalty for taking early retirement benefits — a 30% haircut at age 62 compared to benefits at Full Retirement Age — on every filer no matter their income or health. Everyone also gets the same percentage gain in the amount of Social Security benefits received for delaying filing up to age 70 (124% of what you’d get claiming at Full Retirement Age).
In sharp contrast, Alstott thinks low earners should be able to collect nearly a full retirement benefit at age 62, with only a 10% penalty. In other words, the person who worked the low-wage, checkout counter job at a big box retailer without retirement savings could file at 62 and get close to her full Social Security benefit right away. Conversely, the highest earners would pay a steep 80% penalty for filing at age 62, a clear disincentive to filing. Everyone would get the maximum benefit at age 76.
Look at it this way: You could still file beginning at 62 or all the way up to 76. Along the way, you’d pay a lower penalty for filing early the lower your lifetime income, and vice versa. The financial penalty would shrink for everyone the closer they get to 76.
Helping the Disadvantaged
Alstott’s proposal is a clever way of redirecting Social Security benefits toward the disadvantaged without explicitly using means-testing to accomplish that goal.
“The basic idea is that the retirement age would remain universal, but the timing penalties for early retirement would be progressive, permitting lower earners to retire earlier than higher earners with less financial cost in doing so,” she writes. “Today, with fixed penalties for retiring before age 70, a low earner who retires early sacrifices retirement security for the rest of her life. By contrast, progressive retirement timing would ensure that low earners who claim early receive 90% of their maximum benefit.”
Clearly, her idea is a dramatic shift from current practice. There would need to be a period of transition. Alstott suggests those currently in their 50s or younger probably would have enough time to adjust their finances and expectations to this new system; everyone older would play by the current rules.
What do you think?
Personally, I believe Alstott’s focus on laying out the moral arguments behind changes is salutary. That said, I don’t like a Full Retirement Age of 76. I’d vote for sticking with 70. And I’m not convinced about the wisdom of her stiff penalty for early filing among better-off Americans, many who may live comfortably but are far from wealthy. Also, the public might see Alstott’s changes imposing means testing, which would undermine support for Social Security.
Social Security Incentives to Keep Working
I wonder, though, if there should be a greater emphasis on creating positive incentives into Social Security to encourage longer work lives for everyone. That would be a boon to the U.S. economy, society and households.
Take the proposal of Jingjing Chai, Raimond Maurer, and Ralph Rogalla of Goethe University and Olivia Mitchell of the Wharton School at the University of Pennsylvania in “Exchanging Delayed Social Security Benefits for Lump Sums: Could This Incentivize Longer Work Careers?” They want to reward people who delay claiming their Social Security benefits and keep working.
Let’s say a female worker decides to stay on the job until 66, rather than retire at 65. With their proposal, at 66, she’d get a lump sum worth 1.2 times the age-65 benefit as well as the age-65 annuity stream of income for life. Their research suggests people like lump-sum payouts for a variety of reasons, including financial flexibility and the option of leaving money to heirs. The lure of the lump sum would encourage workers to voluntarily stay on the job, on average by about 1 1/2 to 2 years longer, they calculate.
Sanguine About Social Security Solvency
I have one more bone to pick with Alstott: She’s too sanguine about the solvency of the Social Security system.
To her, “the solvency debate dodges the moral issues at stake. Insolvency, standing alone, offers no principled grounds for any policy response.” That may be, but ensuring solvency would mean Americans will know they can count on Social Security and can incorporate it into their retirement planning. Solvency reforms would also mean we could dismiss the presumption that Social Security won’t be there when the Millennial generation reaches retirement age.
All in all however,, Alstott’s rich sets of proposals are part of an important, emerging conversation on the need to adjust America’s social safety net for the modern labor market, the modern family and a modern aging population.
Social Security was designed for a different era. Its rules assume the typical worker is a full-time, long-term employee who gets health insurance and retirement savings benefits through his or her employer; that the American family is a married couple with children and the wife doesn’t work and that Americans are ready to embrace full-time leisure at around 60.
Here’s what’s really happening: The changing nature of work is pushing more and more people toward multiple jobs, fluid careers and on-demand tasks. Only 46% of kids younger than 18 live in a “traditional” home. The labor force participation rate of all workers at 60+ and 65+ is climbing higher. In a sharp break with even the recent past, most boomers are engaged in some kind of bridge job, semi-retirement work orflexible employment or own a business well into the traditional retirement years.
Put it this way: Alstott is asking all the right questions. I just don’t necessarily agree with her answers.
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