Mar 23, 2012

Is The Actuarial Reduction Still Fair?

     Full retirement age for Social Security benefits is currently 66. This will soon start rising to 67. Most people go on Social Security retirement benefits before their full retirement age, a key fact that is usually lost when politicians talk of raising the retirement age. Those who go on retirement benefits before their full retirement age receive reduced benefits. This is called the actuarial reduction. This actuarial reduction was 20% when the full retirement age was 65 and is going up to 25% when the full retirement age reaches 67. Alicia Munnell and Steven Sass at the Center for Retirement Research at Boston College ask whether the actuarial reduction, which was first enacted more than 50 years ago, remains appropriate. Their conclusion is that it remains pretty close to actuarial equivalence. Their study is flawed, however, by the fact that they pretended that full retirement age was still 65. I don't understand why they did that. They certainly know what the current full retirement age is and doing the projections for full retirement age being 67 should not have been that difficult.


Anonymous said...

It's certainly not clear from the text, but they do account for the increase in the FRA to 66, as they explain in footnote 8: "The benefit of a person claiming at age 62, SSB62, is 80 percent of the benefit claimed at 65, SSB65, through 2000; SSB62 then rises to 80.4 percent of SSB65 by 2008 due to the rise in the Social Security Full Retirement Age from 65 to 66, which reduced SSB62 somewhat less than it reduced SSB65."

The figure goes through only 2011, so they do not do the computation for an FRA of 67.

Anonymous said...

In the old Soviet Union, they allowed retirement for miners at age 50 (if they lived that long) and in the US we 'retire' people after 20 years in military serviece or in fire or police service. Alot of construction workers and over the road truck drivers find that their bodies do not hold out past the mid 40s or 50s.

The plain fact is that a person's useful work life depends on their occupation.

In contrast, one can doddle on as a college professor almost as long as one can breath.
Not everyone does white collar office work.

Nobbins said...

That's true about blue collar workers, but unrelated to this study.

I myself would comment on this study, but I tried to read it and welzzzzzzzz....