NCPA - National Center for Policy Analysis

Streching Social Security Retirement Age Has Ripple Effects

November 29, 2000

The retirement age for Social Security began edging slightly higher this year. Those turning 65 this year will get their retirement benefits two months after their birthday; the retirement age moves upward to age 66 by 2021 and age 67 by 2027.

While this is considered the "normal retirement age," it is actually an actuarial fiction. Many employers, such as DaimlerChrysler, encourage early retirement by their employees. In the U.S., DaimerlChrysler has 65,000 retirees, 78 percent of whom retired before age 65. The size of early retirement benefits from Social Security is based on the time between actual retirement age and normal retirement age. Thus, with the age increase, those who chose early retirement this year got a bigger reduction from their full pension than those who retired early last year. For example:

  • Last year an early retiree (age 62) received 80 percent of their full pension, but retiring at the same age this year would receive only 79.2 percent.
  • In 2021 when the age reaches 66, early retirees will receive only 75 percent of their full benefit.
  • Early retirees will receive only 70 percent of their pension when the normal retirement age reaches 67 in 2027.

The Social Security Administration (SSA) is sure that some of the current retirees drawing early retirement benefits are somewhat disabled. However because of a narrow definition of "disabled" used to qualify workers for regular Social Security disability payments and the long cumbersome process of applying for disability benefits, many simply file for an early pension. As the retirement age increases, SSA anticipates more workers will ask for disability benefits who would not have done so when the age was 65. SSA projects that by 2020 the percentage of men at age 64 seeking disability benefits will almost double.

Under current law seniors become eligible for Medicare at age 65, even though the retirement age has increased. Recently a proposal was made to lock the Medicare eligibility age to that of Social Security. An analysis, however, concluded that roughly 25 percent of the money saved by the later eligibility date would be spent on those who qualified for disability benefits.

Source: Daniel B. Moskowitz, "Stretching Social Security Retirement Age Hits Medicare and Private Pension Plans," Perspectives on the Marketplace, October 18, 2000, Faulkner and Gray's Healthcare Information Center, 1325 G Street, NW, Suite 970, Washington, D.C.

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