Calling age 66 or 67 the "full retirement age" -- as Social Security does now -- just muddies the waters and encourages people to take benefits too early. The government ought to change the wording to make the picture clearer, says one of the country's most knowledgeable experts on the program.
"We have a retirement system that pays the best benefits at age 70, and we should tell people that because they don't know it," says Alicia Munnell, director of the Center for Retirement Research at Boston College.
In a new research brief, Munnell explains her retirement planning theory this way.
When Social Security benefits were first paid in 1940, the retirement age was 65 and the average life expectancy for men was an additional 12.7 years. For women, it was an additional 14.7 years. By 2015, life expectancy for 65-year-old men will be 19.3 additional years, and for women it will be 21.6 years. That's nearly seven additional years for both men and women compared to 73 years ago, when the program was new.
Munnell says she's not advocating any change in Social Security because legislators already made the change in 1983. They rejiggered the actuarial calculations to ensure that the person who claims at 62 gets the same amount of money over an expected lifetime as a person who claims at 70. Using a $1,000 benefit as an example, the benefit table looks like this:
- Monthly benefit at age 70, $1,000.
- Monthly benefit at age 67, $818.
- Monthly benefit at age 65, $707.
- Monthly benefit at age 62, $568.
The problem for people who claim at 62 is their odds of living longer than the standard life expectancy. The actuarial math tells us about 50 percent of people will live longer than full life expectancy, which is about 85. If these long-lived people claim at 62 or even 67, they cut their payments substantially -- for the rest of their lives. The deck is stacked against them.
Munnell thinks it makes a lot more sense for people who haven't saved much money to spend down their 401(k) plans during early retirement, knowing that by waiting until age 70 to claim Social Security, they'll get a much greater benefit -- one that is guaranteed for life and is inflation-adjusted. That will make up for spending their savings early.
"Acknowledging that the full retirement age isn't really 66 or 67 forces people to evaluate those totals for what they are," Munnell says. "And if they do that, they can better understand the implications."
Social Security was and is an insurance plan -- not a retirement savings plan. Understanding that and managing your participation accordingly will lead to more money in your golden years -- and who doesn't want that?