Retirement Responses to Early Social Security Benefit Reductions
by Olivia S. Mitchell and John W.R. Phillips
It has been suggested that cutting early Social Security retirement benefits might lessen the solvency problems of Social Security, since most Americans retire early by filing for Social Security benefits at age 62. Many policymakers appear to believe that retirement patterns (workers’ age at retirement and type of benefit applied for) would change if early social security benefits were reduced. Officials of the U.S. General Accounting Office as well as the Social Security Trustees have offered the opinion that raising the early retirement age would lead to an increase in the number of workers applying for disability benefits. However, there is very little research evidence on the size and direction of potential changes in workers’ retirement patterns in response to reductions in early retirement benefits. Nor is there much evidence on who would be affected and how. This is important information for policymakers weighing the relative merit of such a policy change.
In this Issue in Brief, we summarize analyses that examine who would be affected by reductions in early Social Security benefits and what changes workers might make in their retirement plans based on this altered policy. To do this, we consider three different pathways into retirement:
· Workers who applied for disability retirement (DR) prior to age 65
· Workers who took early retirement (ER) at or between ages 62 and 64
· Workers who took normal retirement (NR) at or after 65
Because we have no actual experience of early benefit reductions, our analysis employs a policy experiment in which we use information obtained from older workers to estimate what the effects might be of specific reductions on their retirement options and choices. We also employ a life cycle approach, which means that we consider the entire work history as well as the stream of expected future benefits (over several years) as influencing retirement decisions.
Eligibility and Benefits under the Old-Age, Survivors, and Disability Insurance system (OASDI).
Eligibility for Social Security retirement benefits requires that a worker must have earned 40 quarters of coverage in order to be fully insured. If this is accomplished by age 62, then early retirement is permitted. Eligibility for disability insurance includes a requirement that the worker must have earned 20 quarters of coverage during the last 40 calendar quarters ending in disability. The benefit calculated by Social Security is the Primary Insurance Amount (PIA); however, the actual amount paid out depends on the worker’s age at retirement. If the worker is 65, currently the normal retirement (NR) age, then his benefit equals the PIA. If he is less than 65 years old, the benefit is reduced 5/9 of a percent for every month below that age. Workers taking early retirement (ER) thus receive 80 percent of the full PIA. If the worker is eligible for Disability Retirement (DR) then his benefit equals his PIA and may be paid out earlier than age 65.
The Data
To understand the impact of these rules and changes to them on the behavior of real workers, we used data from the University of Michigan Health and Retirement Study (HRS), a nationally representative panel survey of older Americans. These data can be linked to social security records, allowing us to compute respondents’ eligibility status for benefits as well as the likely benefit amounts workers would receive for selecting the retirement pathways we consider (ER, NR, and DR). We are also able to include