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Have We Finally Achieved Actuarial Fairness of Social Security Retirement Benefits and Will It Last?

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Abstract

This paper develops a framework to analyze the actuarial adjustments faced by American workers who claim Social Security benefits before or after their Full Retirement Age (FRA). We derive the conditions under which these adjustments are “actuarially fair” (or “neutral”) and develop measures to characterize the devi- ation from the fair form. Fair adjustment schedules are increasing at an increasing rate in take-up age and become flatter as longevity rises. We document that the actuarial fit has improved across generations. Our baseline 3% discount rate scenario estimates that the current schedule deviates from its fair form by less than 1% for average-mortality beneficiaries, compared to 5.1% and 4.0% for male and female beneficiaries in 1980, respectively. The improvement is largely due to the increases in the Delayed Retirement Credit. For men, gains in life expectancy combined with the increase in the FRA also contributed to the improved fit. We predict that the designated increase in the FRA to age 67 will have little effect on the actuarial fit. We investi- gate schedules reflecting (further) increases in the retirement ages, as recommended by the President’s 2010 Fiscal Commission, and propose alternatives. We also discuss results from the analysis of the adjustments to spousal and widow(er) benefits.

Key Findings

  • We show that Social Security old age pension benefit adjustments have become significantly closer to actuarially fair across beneficiaries born between 1917 and 1943.
  • For discount rates consistent with long-term average (real) interest rates, we estimate that the current adjustment schedule for workers deviates from its fair form by less than 1% for average-mortality beneficiaries, compared to 5.1% and 4.0% for male and female beneficiaries in 1980.
  • The improvement is largely due to the increases in the Delayed Retirement Credit. For men, gains in life expectancy in conjunction with increases in the Full Retirement Age (FRA) also contributed to the better fit.
  • We predict that the designated increase in the FRA to age 67 will have little effect on the actuarial fit.

Citation

Heiland, Frank W. and Na Yin. 2014. “Have We Finally Achieved Actuarial Fairness of Social Security Retirement Benefits and Will It Last?” Ann Arbor MI: University of Michigan Retirement Research Center (MRRC) Working Paper, WP 2014-307. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp307.pdf

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Project

Paper ID

WP 2014-307

Publication Type

Working Paper

Publication Year

2014