Debates about reforming Social Security usually center on cutting benefits, raising the retirement age or increasing taxes.
But there’s a new idea floating around that claims it can shore up Social Security’s finances without employing any of those oft-discussed options.
A new paper proposes a minor tweak in the Social Security system: offering “bonus” lump-sum payments to people who delay collecting their benefits.
An explanation, from Vox:
The paper argues that you don’t actually need to cut benefits in order to persuade people to work longer and bolster Social Security’s finances. All policymakers would need to do is switch the program design. Make people eligible at 62 for the exact benefits that they are currently eligible for at 62. But tell them that if they delay receiving benefits until later, they will get extra money. Not in the form of a small increase in the monthly check, but in the form of a single bonus payment. The idea is that the bonus payment should be “fair” — equal in value to the expected lifetime bonus under the current system.
The authors surveyed members of the RAND Corporation’s American Life Panel to see how people say they would respond to lump-sum payments. They find that depending on the details of program design, people would delay retirement by 6-8 months and spend the majority of that time working.
Kevin Drum at Mother Jones applies some numbers to this idea to further demonstrate how it would work:
[Social Security] currently allows you to retire at age 62, but offers you a higher monthly payment if you retire later. For example, if you retire at 62, your monthly benefit might be $1,500, but if you delay a year, your monthly benefit might go up to $1,600. Given average lifespans, the total payout works out the same in both scenarios.
But what if you offered retirees a different deal? What if, instead of a higher monthly benefit, you offered them a lump sum payout if they delayed retirement? In the example above, if you delay retirement to 63, you’ll still get $1,500 per month, but you’d also get a $20,000 lump sum payout. Delay to age 70 and you’d get a lump sum of nearly $200,000.
How would it help Social Security become more sustainable? Vox explains:
Since the benefits would be actuarially fair, this would not save the government any money. But since people would be working longer, the overall size of the economy and the tax base would be larger. That extends the life of the Social Security Trust Fund, and helps delay the moment at which benefit cuts or tax increases are necessary. The overall scale of the change is not enormous, but it’s distinctly positive and it’s hard to see what the downside would be.
The research paper that proposed the idea can be read here.
Photo Credit: 401(K) 2012 via Flickr Creative Commons License
