Before politicians can fix Social Security, they need to take steps to ensure that older Americans feel more secure about their financial future due to the fruits of their own labor, rather than any form of entitlement.
Recently, a study done by economists affiliated with the University of Michigan Retirement Research Center may have shined a light on a way to do that.
The study was nonpartisan and apolitical, which is precisely why it makes so much sense that neither party is likely to pick up the ball and run with it, but for anyone staring retirement in the face, the research has some interesting implications for their own lives, even if Congress never uses it as a blueprint for doing the right thing.
The basic concept that economists John Laitner and Dan Silverman set out to study was whether heightened longevity might lead to longer, more productive work careers.
While people are living longer – and are generally seen as being capable of working longer – “most people have opted to take most of that extra time they have as additional retirement, rather than additional work,” Laitner said.
Keeping the numbers simple, say that life expectancies have grown from roughly 70 years of age to nearly 80, but that the average working career has remained 35 years and the average person has retired at age 60.
When life expectancies were shorter, a 60-year-old retiree could expect to have 10 years after they stopped working. They had worked for 50 percent of the years in their life expectancy.
With heightened life expectancies, working for half their days would mean they should be employed for closer to 40 years, retiring five years later but still living longer in retirement.
Instead of extending work years, Laitner said most workers take all of the extra time off.
That makes it harder for their retirement savings to last, makes them more vulnerable to market and economic swings, and potentially more dependent on entitlements and government support.
“Our worries was that maybe the tax system – which taxes time spent at work but not time spent at leisure – is biasing them toward choosing retirement for more than a proper share of that extra time,” Laitner said in an interview on my radio show.
Mind you, there is definitely a segment of the older population that wants to work, but that has been forced or “incentivized” out of jobs by employers looking to trim payroll and willing to rely on younger, less-experienced workers. It’s not necessarily easy for senior workers who want to stay employed to keep their jobs.
But Laitner and Silverman – whose research was published in the most recent Journal of Public Economics — simply wanted to know if there was some measure of incentive that would persuade senior workers to lengthen the working percentage of their lives in keeping with their greater longevity.
The “incentive” they came up with is compelling, namely a 10 percent pay raise.
Before you assume this would be a government subsidy or an employer-borne handout, the idea was simply to eliminate Social Security payroll taxes starting when workers are 55 years old.
As a result, take-home pay would jump 10.6 percent, and the average worker would stay on the job 1.5 years longer. During that time, they would continue paying income taxes, their only break would be on the payroll tariff.
Moreover, the way the change would be paid for is by raising payroll taxes slightly for workers who are younger, for whom retirement is not yet an option.
“Our idea was that we would have the Social Security system become vested at some late age, say 55, and prior to that we’d have the payroll tax be a little higher than it is now, but after 55 you’d be done, and the thing would be vested and you would not have to pay the payroll tax anymore,” Laitner said.
“Our thought was you’d be paying a little higher tax early in your career when retirement is not an option, but we take the tax off late in your career when you are trying to decide when to retire.”
Call it a targeted tax cut, aimed at convincing people to overcome biases against working longer.
“It’s kind of a win-win situation,” Laitner said.
“The people would have an option where they could work longer if they choose to do so and get a better deal out of the system ... but if people work longer they would have more resources for retirement, but the federal government would be collecting income taxes for those extra years ...”
Another potential win is that workers who are behind in amassing a retirement nest egg would not only want to work longer, but they would have more take-home pay to get their savings tanks filled before leaving the work force.
The big winners in this would be people who want to work longer, as they would get more time on the job without the payroll tax; the theoretical losers would be people who want to retire as early as possible, who don’t really benefit from the years without a payroll tax.
If the point of seemingly every “reform policy” is to encourage additional work by rewarding it, this would qualify as a big step in the right direction.
That said, it’s not happening any time soon, and most workers today will face their retirement ecision without this kind of targeted tax action.
Still, the basic analysis – “What would make it worthwhile for you to work longer?” – is something that every worker should do if they have the choice to continue their employment, looking at the decision from both a savings and income perspective, as well as how it best serves their personal and financial needs for the rest of their days.
Yes, “additional incentives” would be good, but if you really look at what your savings and income can support and worry that your future may be tight, that should be plenty of incentive to keep working toward a comfortable retirement, rather than diving into one and hoping for the best.Chuck Jaffe is senior columnist for MarketWatch. He can be reached at firstname.lastname@example.org or at Box 70, Cohasset, MA 02025-0070.