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Long retirements strain Social Security

Most gladly retire as soon as benefits are available

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Bill Mossman, 78, stopped working at 62. He's had a joyous retirement — traveling, studying, working out three times a week and assembling a giant collection of historic jazz recordings.

Social Security's early retirement age made it all possible. "I took Social Security benefits right away. We wanted to travel and needed the cash flow," says Mossman, who worked for 39 years as an engineer and manager at an electric utility in Madison, Wis., where he still lives.

The golden age of retirement is in full bloom in the United States. Seniors are healthier, wealthier and more active than ever. Americans are retiring earlier — half retire at age 62 — and living longer.

That's the problem, at least for Social Security.

Early retirement and longer lives have placed an enormous burden on the federal government's national retirement program, threatening the long-term solvency of Social Security. The upcoming retirement of 76 million baby boomers — those born from 1946 to 1964 — has made the issue of long retirements especially urgent. The first wave of boomers turns 62 in 2008.

As President Bush begins his second term, he has put fixing Social Security's financial problems at the top of his domestic agenda for the next four years. His plan to let workers create private investment accounts from Social Security taxes seeks to generate higher returns to cover the costs of longer retirements. But it doesn't address the system's underlying demographic problem: People collect benefits an average of seven years longer than they did in 1960.

"If we're worried about Social Security's finances, we should be talking about the early retirement age, not privatization," says Jonathan Gruber, an economist at the Massachusetts Institute of Technology.

Raising the early retirement age is one of the key levers — along with tax hikes, benefit cuts and private investment accounts — available to Congress as it tries to bring the system into financial balance.

The government effectively established 62 as the official retirement age in 1961 when it lowered the Social Security eligibility age from 65 to 62 for men. It was lowered for women in 1956.

Everywhere in the industrialized world, people retire as soon as government benefits kick in. Fewer than 20 percent of people ages 60 to 64 work in France, Belgium and Italy, where the early retirement age is 60 or younger. In the USA, the percentage of men still working at 63 has fallen from 78 percent in 1960 to 48 percent today. Some of those work part time and collect Social Security.

Long retirements force Social Security to pay a retiree benefits for more years than the system was designed to handle. Early retirements also remove workers from the labor force, meaning less payroll taxes to finance the program.

"We don't want to go back to the bad old days when people worked until they died," says Olivia Mitchell, executive director of the Pension Research Council at the University of Pennsylvania. "But the economy cannot support a system that encourages people to retire at 62 and spend the next 40 years idle."

Social Security offers no long-term financial incentive to work after age 62. Lifetime benefits are roughly the same, on average, whether you retire at 62 or 64 or 66. People who retire early get smaller monthly checks, but they collect Social Security longer. In the end, Social Security is designed to treat early retirees the same as people who wait until the official full retirement age.

Social Security essentially offers an early retirement benefit that is increased about 7.5 percent annually for every year people wait beyond 62.

When people think of Social Security, they often focus on the "normal retirement age" — originally 65, now 66 and on its way to 67 in 2022. But 55 percent of workers start collecting benefits at 62. Less than one-fourth wait until 65 or later.

A debate over age

Social Security's original retirement age of 65 was set in 1935 when life expectancy was 63. Today, life expectancy is 77 — and, for those who live to 65, life expectancy is 83. The system used to benefit financially from people who paid Social Security taxes but didn't live long enough to collect benefits.

Federal Reserve Chairman Alan Greenspan and two federal commissions have suggested that Congress consider raising the early and full retirement ages as one way to improve Social Security's finances.

A one-year increase in the retirement age is equal to a 7 percent benefit cut, says Ron Gebhardtsbauer, senior pension fellow at the American Academy of Actuaries. Such an increase would eliminate about one-third of Social Security's projected $3.7 trillion shortfall over the next 75 years, not counting the extra tax revenue it would generate from people working longer, he says.

But the AARP, a lobbying group for people 50 and older, says delaying retirement would be unfair and isn't necessary to preserve Social Security. "A lot of people who retire early don't do it voluntarily," says Sara Rix, an AARP senior policy adviser. Layoffs and poor health are the reasons, she says. "If the age of eligibility was raised, it would be a hardship on many people, especially those in physically demanding jobs or in poor health."

Baby boomer retirements will push the number of seniors on Social Security from 40 million today to 71 million in 2030.

The baby boomers who retire in 2008 at age 62 will live an average of 20 more years, according to the Social Security Administration. Today's workers don't pay enough Social Security taxes during their careers to cover their lifetime benefits, so baby boom retirements will overwhelm the system unless changes are made.

"We can raise taxes, lower benefits or raise the retirement age," Cornell University economist Richard Burkhauser says. "Or we can all agree to die at the same age as our parents."

His preference: Raise the retirement age. "This is a good news problem," Burkhauser says. "We live longer. Hooray! Social Security needs to adapt to the good news. Private accounts may be a good idea, but they won't solve what is a demographic problem."

Labor unions and others would fight the higher retirement age. "The problem with raising the early retirement age is, politically, it's hard to do," Gebhardtsbauer says. "It sounds great in academic circles, but not when you have to vote for it and lose your job (in Congress)."

Options available

Congress has several options besides raising the eligibility age:

Raise the current Social Security payroll tax — now 12.4 percent — by increasing the tax rate or taxing income above the current $90,000 annual limit.

Cut monthly benefits.

Allow workers to divert some of their Social Security payroll taxes to private investment accounts. Bush says that younger workers could get better returns by investing in stocks and bonds. In return, the government would save money by paying them reduced benefits.

Marjorie Abrams, 67, of Gainesville, Fla., retired from her job overseeing a counseling program five years ago. "I was bored, and I didn't feel like starting a new job or with a new organization," she says.

She took Social Security at age 62, supplemented it with a small pension and carefully watched her spending and investments. Financially and personally, "it has been better than I expected," she says.

She wrote "The Cell Phone," a play that was performed by a local theater company. She just finished a mystery novel, "Murder on the Prairie," that took 2 1/2 years to write.

"I urge everyone I meet to retire as soon as they can," she says.

A Rand Corp. study done for the Social Security Administration shows that retiring early is the choice of every demographic group — rich and poor, men and women. Only about 10 percent of early retirees claim Social Security because of ill health or because they need benefits to avoid poverty, according to studies by Burkhauser, the Cornell economist, and others.

The Rand study found that low-income workers claim Social Security in large numbers at age 62. Many have physically demanding jobs, and Social Security benefits replace a relatively large share of their working income. High-income workers tend to retire before 62 and tap pensions and savings while waiting to claim benefits when they become eligible, the study found. People who keep working tend to be the best educated, in the best health and working in managerial positions.

Social Security has helped provide the money that makes quitting possible. Since 1960, the annual income of seniors has doubled, after adjusting for inflation. The portion of elderly living in poverty has fallen from 34 percent in 1960 to 10 percent. "Early retirement is an accomplishment of a rich society," Mitchell says.

Early retirement is largely a financial and lifestyle decision - a very happy one for the eight retirees interviewed for this story.

Charles Warren, 63, worked for a steel company in Collinsville, Ill., for 38 years before retiring two years ago to Surprise, Ariz., near Phoenix. "I try not to golf more than four times a week," he jokes. He woodworks, stains glass and drives his golf cart to the grocery in his Sun City Grand retirement community.

Warren calculated that he would have to live until age 82 for it to make sense to delay collecting Social Security until his full retirement age of 65 years and seven months. He didn't take the gamble.

"I could die of a heart attack tomorrow," he says. Social Security benefits help him and his wife pay health insurance — $9,000 last year for a policy with a $10,000 deductible — until they qualify for Medicare at age 65. Warren, whose children are grown, also has a pension and a paid-off house.

For those who work past 62, the reason is often simple: health insurance. Carson Parker of Houston turned 62 last year but can't quit his job testing for corrosion at an oil industry research lab because he needs the medical insurance and doesn't qualify for Medicare until age 65. "The job is no thrill, but I don't hate it," he says.

In 1983, Congress raised Social Security taxes and approved reducing benefits through a higher retirement age for people born in 1938 or later. The changes dramatically improved the program's financial health but not enough to fully prepare for the impending arrival of baby boom retirees.

Social Security's eligibility age is the checkered flag that tells people when to retire. A Dartmouth University study estimates that 60 percent of workers would delay retirement if Social Security's early eligibility age were delayed until 64.

"Would I be happy if they moved the retirement age back? Not at all," Warren says. "But I might have tried to work another six months."

To help Social Security, both the early and normal retirement ages would have to be delayed. If only early eligibility were postponed, the same lifetime benefits would be compressed into fewer payments, and Social Security's financial problems would remain.

Gruber and other academics have found that previous cuts in retirement benefits have had little effect in delaying retirement. People just live on less money.

Dangers in raising eligibility age

But raising the retirement age has its own problems. It could even cost the government some money by pushing people onto Social Security's disability rolls.

"I don't view raising the eligibility age as the magic bullet," says Joseph Quinn, dean of arts and sciences at Boston College and an expert on Social Security. "It will hit hard on the least fortunate."

A higher retirement age may not end the golden age of retirement, but it would shorten it. Social Security has given today's retirees a life their parents never knew. Mossman's father died on the job at age 65. His grandparents retired only after their lives as Iowa farmers wore them out.

Mossman decided at an early age that his older years would be better — and Social Security helped make it possible. His benefit is not large: about $750 a month after taxes and Medicare premiums. Mossman's wife, Sue, loved her banking job and worked until she died in 2001 at age 74. She collected about $425 per month in benefits, after taxes, starting at age 70.

Quinn and others fear that further benefit cuts could drive some people who retire too early into poverty. Encouraging people to work longer would help both the economy and seniors' finances.

"It absolutely makes sense to put the early retirement age on the table," says Greg Cusack, former chief benefits officer of the Iowa Public Employees Retirement System.

Cusack retired in August at 61. He starts collecting Social Security in May. He wants to use his retirement to write a book on retirement planning. But Cusack knows the downside of pushing back the retirement age: keeping people stuck in jobs they're ready to leave. "We don't all have a great job like Alan Greenspan," who's 78, he says. "Doing something different is really attractive when you're my age."