Retiring Early? Find a Hobby
Economists and experts on aging say we should encourage the elderly to stay, or get back, in the workplace. But many seniors are not doing so because of a quirk in the law.
By: Tom Jacobs | February 19, 2008 | 07:06 PM (PST) | 
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Current law discourages older workers from earning more than a minimal amount.
In 1935, at the height of the Depression, the last thing the government wanted to do was encourage older Americans to keep working. With unemployment at 20 percent, no one wanted seniors staying in positions that could go to young and middle-aged workers, many of whom were desperately trying to support families. Retirement was, in a sense, patriotic.
This attitude is reflected in the Social Security system, which was signed into law that year. The bill creating the system states that any individual over age 65 who engages in “regular employment” during a given month will lose his or her Social Security benefits for that month. (“Regular employment” was later specified as earning $15 or more — a strict limit even in those pre-inflationary days.)
Today, the labor landscape looks very different. Given the nation’s changing demographics, economists cite an increasing need for seniors with specialized job skills to stay in the work force in some form, while surveys of seniors suggest a large majority of baby boomers want and expect to keep working beyond the normal retirement age.
Yet, current law discourages a significant number of older workers — those who take early retirement at age 62, 63 or 64 — from earning more than a minimal amount. The Social Security benefits of these workers are reduced by $1 for every $2 they earn over $13,000.
Previous studies have found that this restriction — officially named the retirement earnings test, or RET — does not play a substantial role in seniors’ decisions about whether and how much to work. But a new report by economists Steven J. Haider of Michigan State University and David S. Loughran of the RAND Corporation, just published in the Journal of Human Resources, suggests the law is in fact keeping potentially productive people out of the work force.
“Previous estimates had the number at well under 1 percent of workers (who were discouraged from working because of the cap),” Haider said. “Our study found that is way off.”
Haider and Loughran concluded at least 4.8 percent of early retirees have cut back the hours they work to avoid a reduction in their Social Security benefits. The actual number, Haider added, could be considerably higher.
“There are people we miss — like those who look at their options and say, ‘I’m not going to even bother working,’” he said. “Suppose you were a lawyer or doctor. Working part-time and earning $13,000 might not be a reasonable option.”
Or suppose you are working several days a week at Wal-Mart. “Not all part-time workers can choose to work a precise number of hours,” Haider noted. “I might not have the ability to say, ‘When I hit $13,000, I’m going home.’”
In other words, a senior may have a choice between working two days a week and earning $11,000 a year, and working three days a week and earning $14,000 a year. According to Haider, many in that position are opting for the lower salary to avoid getting their Social Security benefits slashed.
The RET applies to Social Security recipients between the age of 62 and the “normal” retirement age, which is gradually increasing from 65 to 67. (Those born between 1943 and 1954 can collect their full benefits by retiring at age 66; those born in 1960 or later will have to wait until they’re 67.)
“That means additional people will be covered (by this restriction in future years),” Haider said. “If this is exactly the population we want to encourage to be in the work force, even discouraging 5 to 10 percent might be a silly policy.”
There is considerable precedent for adjusting the retirement earnings test: It has been altered many times over the decades. In 1950, the RET was eliminated for those over age 75; that age was subsequently lowered to 72 in 1954 and to 70 in 1983. In 1960, the penalties for working were lightened: Instead of losing all Social Security income, those who chose to work would lose $1 in benefits for every $2 they earned.
In 2000, Congress overwhelmingly passed the “Senior Citizens’ Freedom to Work Act,” which eliminated entirely the earnings ceiling for anyone above normal retirement age (then 65). But the restriction continued to apply to those taking early retirement.
The new law enabled Haider and Loughran to study seniors’ work habits from a variety of angles. They looked at shifts in reported income among seniors ages 65 to 69, who, as of 2000, suddenly were under no restrictions. They also examined how income changed when people advanced from age 64 (meaning the cap was in place) to 65 (when it was not).
“On average, people increased their take-home earnings by a tremendous amount (when the tax was no longer an issue),” he said. “As this tax disappears — whether it’s changed because of legislation, or whether people age past it — they absolutely increase their earnings.”
The RET does not affect the solvency of the Social Security system. The way the system is structured, people who are penalized from ages 62 to 65 actually get bigger checks later on, so the net effect is neutral. (As more seniors work, there may be some small benefit to the system since they are continuing to pay into it through their payroll taxes.)
Haider does not believe a change in the law would be a huge help to low-income seniors. “The fact is, the people who are working at these older ages are, for the most part, the healthiest, wealthiest and best-educated individuals,” he said. “It’s much easier for someone with a cushy job like a professor of economics to work at age 75 than it is for somebody who has been loading steel beams onto a truck for 50 years.”
Given that, “The people who are working and are responding to this policy are probably those who are most likely to have adequate savings.” The extra income from working is welcome, but it’s probably not the only thing standing between them and poverty.
Nevertheless, “My personal view is this policy is an antiquated relic,” Haider said. “I don’t have any formal analysis to justify that. But I don’t see much point of having this policy — or at least to have it extend to more and more people.
“A lot of gerontologists now talk about the importance of the elderly remaining active. So it’s not just a matter of our economy might need to rely on the elderly. Perhaps we should let the elderly stay in the work force for their own good.”
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Written By:Tom Jacobs
Tom Jacobs is a veteran journalist with more than 20 years experience at daily newspapers. He has served as a staff writer for the Los Angeles Daily News and the Santa Barbara News-Press. His work has also appeared in the Los…
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POSTED BY: Steve Selengut, April 08, 2008, 05:07 AM
Investment Politics: Jobs, The Economy, and Social Security Who wants to be a president; the President of the United States? Social Security reform is the winning ticket. Research supports the thesis that Social Security reform would provide all the lubrication necessary to get our economic ball bearings rolling in the right direction. Economies do not grow, or increase employment, when job providers are taxed and regulated unmercifully, throttling their energy, creativity, and profitability. Consumer spending pushes the economy; we need to do more than hand out a few hundred bucks. The objective of the exercise, Barack, is to permanently place more disposable income in consumers' wallets while providing incentives for employers to hire more workers. There are three areas where the impact of reforms would be beneficial to all, irrespective of political sentiment. Social Security reform would benefit the most people, most quickly. Next on the list, Hillary, would be elimination of income taxes (federal, state, and local) on: (a) all forms of retirement income, and then, (b) all forms of investment income. Third, and particularly important for job creation, John, would be the elimination of all income taxes and nuisance fees on businesses. Who wants to be President? Social Security will be the easiest to implement quickly while producing unprecedented increases in disposable income, business cost reductions, and job growth. Here's a rough outline of a brainstorming plan. Throw out the politics and focus on the program--- phase one deadline, January 1,2010. Change Social Security funding to a mandatory, private program, for all employed persons, and add a voluntary program for those who are not employed. All employees would contribute to deferred fixed annuities, purchased from new divisions of qualified financial institutions. Existing Social Security credits would be the initial deposit to the contracts for all participants under age 60. Employer matching contributions would be eliminated and participant contributions would be cut to a mandatory 3% of total compensation (including deferred comp, stock options, etc.). Both changes would be phased into the system by participant age group over a five-year period, youngest first. The five age groups would be 13-year periods starting at zero to thirteen (obviously for voluntary accounts) and ending with ages fifty-two through sixty-five. Phase one would involve qualifying providers, assignment of workers, issuance of contracts, elimination of employer matching contributions, and elimination of income taxes on social security payments. Employers would be required to appoint at least one person to coordinate the transition. Contributions to the annuity contracts would begin upon issue; the Social Security Administration (SSA) would have five years to move credits to participants, starting with the youngest group, and would be responsible for shortfalls to retirees for five years. Under the new system, there would be no penalties for early retirement, but tax free annuity payments would begin at age sixty-five whether or not the person continued to work. Participants could voluntarily establish retirement accounts for non-working spouses and children, and could elect to deduct an additional 1% of salary for each account. A new Federal Administration for Social Security (ASS) will select, qualify, and monitor provider companies and their investment portfolios to assure that only high quality, income-generating securities are used to fund benefits. Companies showing a surplus would be able to invest up to 25% of the surplus in stocks that qualify for the Investment Grade Value Stock Index (IGVSI). Only fixed life annuities would be available, but there would be 50% of cash value, family-only, death benefits up until the time of retirement. After age 65, the death benefit would be reduced 10% per year for four years. There would be no loans, withdrawal privileges, etc. The ASS would be represented on provider company boards, would monitor annual audits of firm financial statements, and would supervise the selection of all non-company directors (60% of the board). Each provider company would be encouraged to use non-market value portfolio assessment techniques, such as The Working Capital Model, to monitor income portfolios. Retiree associations would also be represented on company boards of directors, and board member compensation would be capped at a reasonable number, plus 45% of ASS related expenses. Annuity providers would be assigned a fair share of the huge Social Security Retirement Income Account (SSRIA) participant pool; every dollar contributed would be invested. All providers would use the same mortality tables and base interest rate guarantees in their calculations and would be precluded from any form of advertising. Companies would be required to focus 100% of their efforts on the SSRIA. Annuity providers would be allowed a .5% investment management fee so long as the Annuity Investment Portfolio generated no less than the 3.5% income level needed to fund a guaranteed 3% contractual cash value growth rate. 50% of any excess realized income would be added to retirement accounts in the form of dividends. The remaining 50% would be apportioned between three separately managed accounts for: retirement benefit support contingencies (20%), universal health care and disability benefits for annuitants (50%), and post retirement death benefits (10%). Half of the remaining 20% would become "surplus". The balance would accrue equally to the employees of the insurance company--- the mailroom staff receiving the same dollar amount as the CEO. These changes would produce: a whole new sub-industry of jobs, increase disposable income, reduce the Federal budget deficit, provide universal retirement benefit eligibility, stabilize the market for plain vanilla corporate and government debt securities, reduce corporate expenses and product price levels, and subsidize health care for senior citizens. Annuity providers would have significant incentives to minimize costs, but their investment portfolios would be closely supervised to prevent excessive risk. Politicians at all levels just love for us to hate big business, and have no compunctions about taxing and regulating employers in every manner imaginable. The impact is higher prices, lower job creation rates, and the need to move many operations to lower cost environments. Many small businesses simply refuse to hire additional employees. Regulatory procedures and company defense measures add billions to the costs of goods and services. Social Security benefits are grossly inadequate yet we continue to tax all forms of retirement benefits. Politicians ignore the simple solutions to these problems and no one seems to care about Social Security reform. It's just too big an issue to be so shockingly ignored, but the last politician with any courage--- well, I can't remember who that was either. Steve Selengut http://www.sancoservices.com http://www.valuestockindex.com Professional Portfolio Management since 1979 Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"