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New CBO report – Lower (not increase) the early retirement age!
At one point or another, all the big name politicians have indicated they would support changing the minimum Early Eligibility Age (EEA) rules for Social Security. Obama has said it, so has Boehner. Even guys who love Social Security, like Sen. Harry Reid, thought it might be okay. Many economists have publicly opined that raising the EEA for benefits is good economics, as the average life expectancy is higher than it was forty years ago. To me, the most significant evidence that a consensus is forming on this important issue is the fact that the ultimate supporter of the Grey Panthers, the AARP, came out with its support last year.
I think that all of these deep thinkers are wrong. In fact, a good case can be made for lowering the minimum retirement age from 62 to 60. From the Congressional Budget Office report on the consequences of increasing the Early Eligibility Age (EEA):
If that doesn’t convince you, consider these words:
Budgetary Effects
The budgetary effects of a rise in the EEA in the short term would be different from those over a longer period. Federal outlays would decline in the short term because people would have to wait until they were older to apply for Social Security benefits. Over time, higher subsequent monthly benefits would offset an increasing share of the savings from delayed eligibility.
How is it possible that all of the folks pushing for an increase in the EEA could be wrong on this issue? Intuitively it makes sense. Delaying the age for benefits should reduce expenses for SS and therefore save it money, thus keeping it solvent for longer. It sounds so simple. Why doesn’t it work?
The answer is that increasing the EEA won't improve the finances of Social Security (or the country as a whole). SS discounts the amount payable if early retirement is opted for. It is calculated so that SS is “expense neutral” if benefits are taken at today’s EEA of 62 years versus the higher benefits available by waiting until 64 years.
The following formulas are a simplified look at how this works:
Case #1
Benefits payable at age 62 = $1,000 per month
Average Life / (years of benefits)= 78 / (16 years)
Total life time benefits = $192,000
Case #2
Benefits payable at age 64 = $1,142
Average Life / (years of benefits) = 78 / (14 years)
Total life time benefits = $191,856
The formula that SS uses to discount benefits for those seeking payments prior to their Full Retirement Age (FRA) is quite simple:
The reductions are based on the month of claiming: A benefit is reduced by 5/9 of 1 percent for each of the first 36 months before the FRA.
For example, if a man was expecting a monthly check of $1,000 at FRA, he would receive $810 monthly if they took benefits three years earlier. This simple formula immunizes SS from the cost of those seeking benefits early.
I hope that this discussion proves the point. There is no economic consequence to SS (or to the overall fiscal position of the US) from raising the EEA. Now consider what would happen if the EEA were to be lowered from age 62 to 60 years.
Using the same 5/9th% monthly discount rate, the individual who seeks benefits at age 60 would get a check 13% less than what he would have received by waiting until he was 62 to quit working. Using the formula from above:
Case #3
Benefits payable at age 62 = $1,000 per month
Benefits payable at age 60 = $870 per month
Average life (years of benefits) = 78 / (16)
Life time benefits = $188,000
Note: The $188,000 number above does not take into consideration the time value of money and changes in payments of Disability Benefits. When these factors are built into the equation, the numbers between the various ages of retirement all equal out.
Today, approximately 60% of eligible beneficiaries elect to get their SS checks at age 62 (EEA). I can't’ accurately project how many people would elect to retire at age 60 or 61, if it were possible to get discounted benefits at earlier ages. I think it's a large number.
Of the 3.6mm individuals who will get new SS benefits this year, 2.2mm (60% of total) are getting their checks upon reaching the EEA. If the EEA were lowered to age 60, how many people would take advantage of the change? Given that there are two years worth of individuals who would be eligible for reduced benefits, an estimate for the number of people who might opt-in to early retirement, if given the chance, is between zero and 4.4mm. For the sake of discussion, call it 2mm. That would be very helpful.
What would this do for the economy? It would shrink the supply of available workers. It would happen fairly quickly over the course of the first two years that the EEA adjustments became effective. As older workers leave the workforce earlier, the demand for younger workers would increase. People at all ages (including older workers not seeking to retire) would “move up the ladder” faster. There would be more new job openings for younger workers coming into the labor force.
High unemployment is corrosive to society. It’s particularly problematic when the shortage of jobs creates very high rates of unemployment for young workers. High youth unemployment is the scourge of Europe today. Total unemployment in some of these countries is around 10%, but youth unemployment is over 20%. The situation is similar in the USA. The numbers have not yet reached the levels in Europe, but the trend in the USA is firmly in place. If nothing is done, the likely outcome is for youth unemployment north of 20% in the USA.
Based on the information provided by the CBO, I think it should have analyzed changing the EEA down (as well as up). Lowering the EEA would be neutral to the long-term finances of both SS and the country. It would also open up a few million jobs. Many of those jobs would be entry level positions. Just what we need. This chart illustrates the problem we face. Employment for younger workers is currently at a post WWII low.
I can’t figure out why the CBO didn’t consider the implications of a reduction of the EEA. A team of analysts must have worked on the report for weeks. But they only looked “inside of the box”; the CBO needs to look “outside of the box” to find options for the issues we face.
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Note: The CBO also looked at raising the Full Retirement Age (FRA) from 67 to 70. This is a different kettle of fish than increasing (or decreasing) the EEA. This approach would benefit SS. But it would have a range of negative consequences as well. I’ll discuss increasing the FRA in a separate post. Enough on SS/CBO for one day.
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Clever, and kudos for "thinking outside the box" (again, which is against conventional wisdom, whereby "conventional wisdom" is most typically unwise).
Bruce's argument can be further justified by the "retirement planners" that (strongly) suggest retirees "delay" collection of SS so that when the checks roll in, they are for the "maximum amount", which net-present-value computations over the life-of-retirement overwhelmingly supports (e.g., it's the biggest "win" for the retiree, and thus the biggest "loss" to the SS fund).
However, the "flaw" is that the forcibly-retired Boomers that are under-age can't draw yet. Opening that door will massively (additionally) stress the SS fund. Further, Bruce assumes these computations matter, and they don't. We will pretend we have an SS fund, until suddenly, we don't.
At present, we are merely attempting to delay-this-realization. That's why raising the age is more palatable, and why lowering-the-age forces onto the balance sheet now those liabilities that we are pretending to not consider. Permitting more withdrawals now (by lowering the age) will shorten-the-time to our "the-jig-is-up" realization.
Bruce is trying to be honest with math, and in a sane world, he would be considered, "the biggest adult in the room". However, being "honest" no longer matters. There is no math possible to make SS viable. (On this point, Bruce and I disagree.)
SS is funded entirely by the taxpayer ("real" money).
The US military is totally funded with printed fiat cash.
The taxpayer does not provide any of it. It's pure debt, paid with a credit card basically.
KK's bizarro world follows:
With the money that was saved from making the US military a (still really deadly) defensive only force, we were able to fund SS with the left over debt/fiat cash for the next 1000 years.
I mean, the US military was able to buy 10x the drones they have now and still had cash left to hire actual ninjas. They were designed to work with a carrier strike group for hostage situations etc. Perfect.
I mean, what else do ya need?
People rant and rave about SS "running out of cash" but *never* question all the other expenses run up using fiat cash.
US taxes collected *do not* pay for very much in this country.
So, we need to *choose* the right things to fund. Priorities.
Do we take care of everyone, not just military members and their retirement....or do we stay an ultra-militarized Roman/North Korean society?
The choice is yours my friends.
I detect a whiff of utter nonsense in KK's statements. The money paid via FICA taxes is just added to the pot along with regular income taxes. Money paid out, whether to SS or the military, comes out of the same pot. The SS trust fund is a convenient fiction, nothing more. And we are most definitely NOT an ultra-militarized society, although we are well on our way to becoming a society of serfs, if not slaves, lorded over by the Big Brother types.
My bizarro world would have the US government only fund those items mentioned in the Constitution. The military is mentioned, which should be used for defensive purposes that don't include forcing our kleptocracy on other nations. Running a retirement plan is not in the Constitution. Nor are things like funding education, having a Department of Energy, providing food for people - think SNAP - or running medical insurance schemes - think Medicare and Medicaid - to be found anywhere in the Constitution. When Eisenhower first proposed the interstate highway system is was, on the surface at least, in the context of national defense, not encouraging private transportation. Far too many propose to use the central government to provide a safety net.
I say hogwash. People should be more self-reliant. They should be able to save for the future on their own - although this would require the central government to maintain the purchasing power of money. They should have families that help them through difficulties - families which the central government has done much to destroy. The next level of support should come from communities, groups of like-minded people. Those are voluntary associations, and there is nothing in the Constitution that permits transfer payments.
I'm 65. My job was eliminated in July as a result of corporate mergers. I was forced into Medicare, and am on the verge of collecting Social Security. I see collecting SS as a way of recouping what I already was forced to 'contribute'. The system is dysfunctional, is becoming worse every day, and will collapse. I feel sorry for those deluded fools who can't see that and continue to look to government to "take care of everyone".
No matter the next President of the United States, Mr. President 2012 will preside over a bond market collapse, resulting in a collapse in government spending (consider when the US bond market and currency collapses, the US will no longer be able to borrow or print the difference between government spending and government revenues). The collapse in government spending will devastate those dependent on government, which is a recipe for an unruly society that will put pressure on the government to “save them.” All that’s propped up by government spending will come crashing down including:
The size and scope of those dependent on government spending is enormous, which is why it is so difficult to cut spending. But delaying the cuts simply means destroying further the fundamentals of the economy and a bigger whole to dig out of when the bond bubble is pricked. And the bond bubble will implode because the US is beyond broke as previously covered here.
The mainstream farce of a media refuses to spend five minutes of research to see exactly how broke the US is and is advocating for the US to go deeper into debt. For example, the media is pushing for the debt ceiling to be raised so the US can charge more onto the national credit card. The debt ceiling should not be raised. The US should not go deeper into debt.
Ron Paul is the only candidate that understands what the country is about to go through (Ron Paul is not clairvoyant, but he can predict the future because he understands the consequences of ultra low interest rates, printing money, and debt). Ron Paul understands how the Federal Reserve is financing government spending. Ron Paul understands that wealth will be transferred from fiat currency to real money, gold and silver.
During the collapse of the currency, Ron Paul will fight to get government out of the way in order to allow the market to determine the most efficient flow of resources. No other candidate understands where money comes from and how wealth is created, which is why it must be Ron Paul that makes it into the White House during this crucial time when cries for government intervention will grow loudest. No other candidates firmly believe in the markets, which is why when social unrest comes, other candidates (Romney and Obama), will resort to centrally planning the economy which will only destroy it further. As previously mentioned here, Obama is a central planner at heart as he thinks capitalism “has never worked.” As this video shows, Romney will do whatever is politically necessary.
TheSilverJournal.com
@ Silver Journal...the kid in that video is 12 years old...is that you?
Don't be a cock. One thing that's sure before, during, and after the collapse is that haters will hate.
"The money paid via FICA taxes is just added to the pot along with regular income taxes. Money paid out, whether to SS or the military, comes out of the same pot."
Nope....the gov. actually pretends it's separate (well, they *do* segregate the funds)....hence all the talk about the SS fund being broke etc. It's a way to threaten the people psychologically. And it works as evidenced by the comments here.
It's their way of manufacturing a crisis where there is none.
This is why I say...if it's all in the same pot...then you have to re-allocate correctly.
If you want your SS benefit $$$ back...fine. That's ok.
For all those who never paid in yet, starting *right now*...kill *ALL* FICA taxes for them.
In order for your "constitutionally correct" retirement plan to work....the people must not have their earnings confiscated *right now*. Starting tomorrow.
If you do want to provide social benefits to all...the US citizens *have* to choose.
Outrageous war spending and benefits for disabled/maimed soldiers into infinity....or defensive spending...and a smaller number of soldiers kept in one piece to keep costs WAY down. Kids still have their dads...the dads still have their arms to throw kid a football/baseball. Wives still have husbands.
This lets the US reallocate and spend on the rest of the population easily.
If you want to play soldier...there would always be the Coast Guard and Border Patrol. Some people like that shit. Cool! Send em' to the Arizona border and get this crap under control. I hear it's a target rich environment!
Russia/China/Whoever steam towards the US on ships?...our overload of big missles and subs already make that impossible.
Badass! See, we don't even need to do what we've been doing. Unless war has really been about US empire all this time...hmmm.
Smedley Butler *a Marine Major General* told ya *all* about that one...in the freakin 1930's!
Was everybody deaf or just overcome by the big money interests?
Fast forward to 2012...
The system as it has been run is now untenable. It will bring down the entire country eventually. Default. Broke.
How far down do US citizens want to go? Is a big primarily military-focused society, police state and civil unrest cheaper? Ponder that one. That is the current course.
Everybody can be happy. It's not a big problem at all.
Priorities.
Perfect! Certainly CHina and Russia don't have any bid missiles of their own to lob at us, and of course, this "defensive only" force could be fueled by hydrogen, or solar, or unicorn farts.
Just let the rest of the world know,they're on their own. Just keep selling us all your resources real scheap, because we're America, fuck yeah! (Were you weaned on paint thinner? Of course it's been about empire the whole. That's what the Fed was built for, as one example.)
How exactly does this plan close the deficit, or reduce the debt (money already spent).? It doesn't, but don't let the uncomfortabler facts get in the way of a simplistic unworkable "solution".
This is such a pile of theoretical delusion it's almost reached the level of Marxism. It's like the OWS morons, who think they're the first ones to ever discover that people with wealth and power will do most anything to maintain that wealth and power. Americans aren't going to voluntarily forgo the "security" of a powerful military and/or a "guaranteed" retirement. Everybody understands the math doesn't work, but fuck that, they want to get theirs.
Then just like the Romans.....the US will get it's reward.
Empire collapses into chaos. That ending is built in...inescapable...*if* you are hell bent on "world domination".
You are actually trying to argue against history. I think. The jumble of thoughts didn't come out too well.
Since the US people allowed the Fed to exist...unchallenged...all these years...it's close to over.
My "plan" would repair the broken psychological state of the American people first. That's critical.
Secondly, it would stop the insane amount of resources being destroyed daily by the US military (and the opposing military).
Think of the fuel and metals etc. used on *both* sides.
Not to mention the human cost. Heavy.
War is *incredibly* profitable for those at the top. Cash gets siphoned off both parties.
The war pigs, rulers, and bankers need to be stopped and cut off. Yesterday.
If US corp. "citizens" will not voluntarily do this...then they actually deserve what they have coming.
The complete ruin of the nation is their prize and legacy.
I know real Americans voluntarily work together to fix things. They always do.
Pick a side...and claim your reward. What will it be?
You're discussing trade-offs between priorities. It is a legitimate point (on what should we spend our money?), but is not relevant to the greater issue that:
money is fungible (all spending comes from the same pot)
...the greater issue being, "there is no such thing as real money" anymore.
The SS program is not viable, and nothing will make it viable. We don't need to consider other-stupid-spending-in-other-programs to have this particular discussion about one program.
Curiously, tax receipts are actually fairly irrelevant at this point. We're borrowing-and-printing, and taxes don't matter anymore. (They can serve as a dis-incentive, but the amounts collected are irrelevant as it relates to any government programs or spending.) Further, in the context of SS (funded entirely through payroll taxes), there's no money going into SS at all since those taxes were "temporarily suspended". SS is one of the biggest examples of raw printing (since money goes out, but none comes in), and emphasizes my point (tax receipts are irrelevant anymore).
I would agree if we had an option to decide how to spend money, but we don't: The issue is whether we will service past debt. Since we can't, the future is merely default (no matter how we prioritize right now), and we are limited to merely discussing priorities for how we spend whatever money exists *after* a default.
"I would agree if we had an option to decide how to spend money, but we don't: The issue is whether we will service past debt. Since we can't, the future is merely default (no matter how we prioritize right now), and we are limited to merely discussing priorities for how we spend whatever money exists *after* a default."
I agree completely.
Yes, this is what we are limited to doing now....due to generations of dumbasses making the wrong choices.
So.....when you see Congress still going down the same road....you know what the game is.
But....
I still think there could be many positive gains made from following my suggestions right now (not a moment to lose).
There are benefits beyond what the numbers would indicate.
Having a non-paranoid US population once the "perpetual war alert" is shut off...*priceless*.
War takes a lot of "mindpower" and manpower.
Deactivate the offense side of the war machine and you free up a lot of resources worldwide.
Less pressure on *everything*. I bet fuel prices alone would drop like a rock.
The need for a police state and internal civil war would be averted nicely.
It's easy actually. But there are those that would have you believe it's not.
Bruce's point was not just letting people retire early it was also to open up jobs at the other end of the life cycle. If a 'working' 60-65 year old retires their job, presumably, will be need to be filled. That creates a chain of promotions and hiring back down the line.Hopefully, this would include hiring a now 'unemployed' young person who would then no longer be a food stamp/unemployment eligible ward of the state but a taxpaying worker on a career path.
Fair point, but it won't do that.
Companies will not replace the lost workers. They would *love* to get rid of more (old-and-expensive) workers by having those workers voluntarily leave (passing them to the taxpayer-liabilities-programs). Our current "economic friction" makes it fairly expensive for the company to get rid of this type of worker. (These older workers are too expensive, and companies fear age discrimination lawsuits.)
For those cases where the old-but-expensive worker is needed and the company *wants* to replace him, the company will not find a qualified candidate (think current specialized technical positions). Eventually the position may be filled, but significant productivity will be lost in the meantime in finding-and-training the new hire.
For those few positions where the company *does* hire new workers, the younger-and-cheaper workers will reflect the lower corporate margins, and reflect contract labor (not new employees).
The idea is not without merit, but it won't work. It reflects another form of "central planning" where we are merely trying to shift incentives to encourage workforce growth and productivity. And, it won't do that, because this type of social engineering has nothing whatsoever to do with societal productivity. (If it impacts productivity, then it will do so negatively: We are merely increasingly paying people to not work, and cost-shifting this [tax] burden to the producers, who increasingly will decide it's not worth it to produce anything.)
Many of those opting for early retirement have been forced to because of the crash. Social Security is NOT preferable to a full time job unless of course your are telling a professional she now has to work part time or at McDonald's.
I know an awful lot of college grads struggling to get their start. However, I know a lot of talented older workers who are being underutilized. What a waste of energy and talent.
Agreed. Early SS is not "preferable", what is preferable these days? Nothing that I can see.
This would create a new option for some older workers. Nothing mandatory about this. Some would choose to change their lives. When you're 60 there's a chance to do that. When you're 67 it's very difficult.
What's the downside to this idea? It creates options that do not now exist. It might improve the overall employment story. It will be most beneficial to younger workers. It does not cost SS more.
This is what the CBO is supposed to do in my opinion. Look at the full range of options. Evaluate them fairly. Let legislators frame legislation that achieves the desired objectives.
Bruce, a lot of those older workers are just sticking around for the health insurance.
I guess the argument for an early out depends on whether Obamacare sticks or what is the alternative.
For employers it's a win because the young hires have lower medical costs so the group plans would have lower costs and lower premiums than otherwise.
I'm guessing a lot of the current cohort of 62-64 year retirees use COBRA coverage to bridge the gap until Medicare kicks in.
The only solution I see that makes earlier SS retirement possible is to extend the COBRA period to 5 years or something like that, but maybe Obamacare makes that a moot point.
I doubt the Medicare entry age drops, unless the whole country goes single payer.
COBRA is very expensive. Not that many folks who are eligible take advantage of it.
COBRA is absurdly expensive.
if the college grads are struggling to get a start would you also argue that by lowering the age of elegibility suddenly there's a chance for not just college grads but ALL WORKERS to have a chance for a good start with, well..."just a job" period? (we'll ignore the crime wave sweeping the nation for now and the ecnomic costs associated thereof.)
Early retirement worked for me ( I retired at 58) because I could keep my healthcare plan from my job. Wiithout that I would either have to have gone 'naked' till 65 or bought private coverage which would have made retirement too expensive.
I think Bruce is on to something though if people could get SS benefits at either 60 or 62 and also 'buy' medicare coverage. Maybe at 50% of their social security benefit. There are probably a lot of people in the 60-65 age group who 'like' to retire but cannot due to the lack of affordable healthcare coverage.
Excellent points re: Health Care. Also, probability of electing early retirement would be influenced by likelyhood of benefits being reduced imminently - s otake 87% starting today, if there is risk that in 3 or 5 years, the payment may have an eligibility criteria, or be cut in half.
"University of debt and home buying – recent college graduates and the growing inflation in college tuition. Many recent graduates unemployed or working in jobs that require no college degree. University of California tuition tripled in last decade while California incomes went stagnant."
http://www.doctorhousingbubble.com/university-of-california-debt-uc-educ...
I agree. Making the elder pay won't change anything. The problem is: Peak Oil, Peak Commodities, and falling EROI. You can cut cut cut slash slash slash and make people work till they die it won't change anything.
There are more than 400 billionaires in the U.S. alone.
Assuming each of these productive job creators had exactly 1 billion dollars each and not a penny more, one could claw back from each of them 900 million dollars and they would still be richer than anyone most people know personally ($100M personal wealth remaining). Multiple Bentleys and Ferraris would still be easy for them, along with large mansions and many servants.
Now assume we have 50 million retirees in a country of 300 million.
Start doing the math and tell me the reason we cannot fund a pension system for everyone.
And then close your eyes and realize that many of the billionaires have tens of billions. And that thousands more have hundreds of millions.
One Billlion is One Thousand Million.
And then close your eyes again and realize that hundreds of corporations ("people") have billions more if not trillions waiting to be spread around in low tax environments.
I am personally glad that these oligarchs can have their billions so that millions of Americans can live on cat food. Bravo, Randism. I'm sure many more jobs have been created by allowing people to generate obscene wealth as described above. As a small business owner myself, I am quite sure I would not continue working hard and trying to make my business grow for less than $150M a year.
Oooh...the top 0.000125%, huh?
You sure you wanna go with that logic?
- The wealth of the top 1%: $19T
- The wealth of the top 20%: $47T
http://www.youtube.com/watch?v=m6ipL7ECoHQ
Then you have $360 billion stolen, sorry clawed back from the rich.
That's good enough to cover <drumroll please> a bit over a quarter of the annual federal deficit. Everything is great, we're saved!
Unfortunately you won't be able to repeat that next year, at least not on the same ex-billionaires.
that's the point of this excellent primer on "actuarial assumptions": the elderly won't pay, they'll just die instead--thus the benefit "doesn't return" but instead stays with the government to...well, we all here know what the government spends its money on. Interestingly perhaps the most prominent "Gray Panther" of them all does get this: his name is Ron Paul, and make no mistake he understands the value of a Federal benefit! (begins with "paying for all those wars!") As proof "peak oil" and "peak commodities" have done nothing but drive down interest rates to at or near zero, thus making the value of that Federal benefit basically...priceless...yes, yes?
Priceless and valueless remain to be seen. Promises are just that.