SOCIAL SECURITY: TOO MUCH CHOICE ALREADY?

More choice is one argument being advanced by proponents of the Bush Administration’s plan to substitute some sort of investment account for a portion of an individual’s social security contributions and benefits. But my feeling, which admittedly is probably a minority view, is that the current social security system already has too much choice. Some things in life are improved by choice. Alternatives regarding, for example, food, vehicles, vacation destinations, TV channels, and beer are good choices.

But when it comes to many things monetary, choice makes my head hurt. Just give me one possibility. I might complain about it, but at least I don’t have to spend an inordinate amount of time analyzing other alternatives.

The choices in the current social security system involve when to start drawing benefits. The system is usually described in most government publications and by the majority of commentators as built around a full retirement age. For those born in 1937 or earlier, the full retirement age is 65. For those born during the period 1938 to1942, the full retirement age increases from just over 65 to just under 66. For us boomers born during the period 1943 to 1954, the full retirement age is 66. For yuppies born during the period 1955 to 1959, the full retirement age increases from just over 66 to just under 67. For those born in 1960 or later, well, it doesn’t really matter because the Cato Institute, the Heritage Foundation, the American Enterprise Institute, and the Bushies have other plans for you.

Regardless of your full retirement age under the current system, you can elect to begin drawing benefits as early as age 62 if you are willing to accept lesser monthly compensation. The reduction in benefits, which is permanent, depends on how close to your full retirement age you are when you begin drawing benefits. The maximum reduction occurs if you retire immediately upon reaching age 62. For those born in 1943 or later, retirement at the stroke of 62 results in a 25 percent reduction from what you would have received if you had waited until full retirement age.

But the full retirement age concept is misleading because if you delay receiving benefits to sometime between your full retirement age and age 70, you get more. How much more depends on how long you wait. For those born in 1943 or later, the yearly increase between full retirement age and age 70 is 8 percent.

Let’s put this in concrete terms. Say you are a boomer—that is, born during the period 1943 to 1954—and say your benefit at the full retirement age of 66 would be $1,000 per month. Thus your benefit if you took early retirement at age 62 would be $750. Here is what delaying benefits would mean:

• Age 62: Monthly Benefit—$750.
• Age 63: Monthly Benefit—$800; 106% of Age 62 Amount.
• Age 64: Monthly Benefit—$867; 116% of Age 62 Amount.
• Age 65: Monthly Benefit—$933; 124% of Age 62 Amount.
• Age 66: Monthly Benefit—$1,000; 133% of Age 62 Amount.
• Age 67: Monthly Benefit—$1,080; 124% of Age 62 Amount.
• Age 68: Monthly Benefit—$1,160; 154% of Age 62 Amount.
• Age 69: Monthly Benefit—$1,240; 165% of Age 62 Amount.
• Age 70: Monthly Benefit—$1,320; 176% of Age 62 Amount.

Thus if you delay benefits until age 70, you would receive almost double what you would receive at age 62. So instead of describing the current system as centered around a full retirement age, a better approach, at least for me, is to view the decision to receive benefits as a bet on when I’m going to croak. By delaying benefits, I would be betting that I’m going to have a viable existence into at least my late 70s. The increased benefits would make that existence more comfortable. By taking benefits early, I would be betting that I’m outta here early.

Does the concept of full retirement age have any real meaning? Yes, and a very important one. If you begin receiving benefits before full retirement age but continue working and receiving earnings, your benefits will reduced. The reduction is $1 for every $2 you make over a limit, which is $12,000 in 2005. In the year you reach full retirement age, the reduction is $1 for every $3 you make over a limit, which is $31,800 in 2005. The reduced benefits do result in increased benefits in later years to account for months you didn’t receive a benefit before reaching full retirement age. Once you reach full retirement age, social security benefits are not affected by other earnings.

The bottom line is that the current social security system requires me to bet on when I’m going to die. By proposing to add even more variables to the system, the Bush Administration apparently wants the members of the younger generation to spend even more time contemplating their demise than us boomers do. With all this attention devoted to death, when do we have time to enjoy the Culture of Life?

DSH