NCPA - National Center for Policy Analysis

WORK AND RETIREMENT

November 3, 2006

One way to soften the blow of the baby boomers' retirement is to encourage them to stay in the workforce longer, or at least not encourage them to leave.  Increasing work by boomers would also increase income tax revenues.  In addition, Medicare's finances would improve because older workers would receive some of their health coverage from employers rather than the government.  It also would keep America's most experienced employees in the workplace, boosting economic output, say Liqun Liu, an associate research scientist and Andrew J. Rettenmaier of the Private Enterprise Research Center at Texas A&M University.

However, features of the current Social Security program actually encourage older Americans to retire earlier.  For example:

  • Social Security withholds a portion of some people's benefits because they earn wages above a certain amount before they reach the normal retirement age (the earnings test). 
  • Benefits for those who continue working past the early retirement age do not properly account for the Social Security payroll taxes paid during the additional working years. 
  • Americans are spending a longer portion of their lives in retirement, but the normal and early retirement ages have not been fully adjusted to reflect rising life expectancies. 

Liu and Rettenmaier recommend three broad measures for reform, but caution that they will not solve Social Security's long-term financing woes.  However, they will reduce the incentives under the current system for seniors to stop working once they are eligible to begin claiming benefits.  Fundamental reforms that address system solvency could build on these changes.  The three broad measures are:

  • Eliminating the earnings test for early retirees (age 62 to the normal retirement age). 
  • Reducing payroll taxes once a worker is eligible to receive Social Security benefits.
  • Accounting for increases in life expectancy by indexing the normal and early retirement ages, and updating the Social Security benefit formula.

Source: Liqun Liu and Andrew J. Rettenmaier, "Work and Retirement," National Center for Policy Analysis, Policy Backgrounder No. 162, October 24, 2006.

For text:

http://www.ncpa.org/pub/bg162

 

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