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Online Extra: Retire at 65? Better Change Your Plans


Back in 1983, in an effort to shore up an underfunded Social Security system, Congress voted to do what today would seem like political suicide: It whittled back the amount paid to retirees. The cut was accomplished by increasing the age at which workers can begin to receive their full, life-long monthly benefit, to 67 from 65. That's "the same thing as reducing benefits," says William Gale, a senior fellow at the Brookings Institution who specializes in tax and fiscal policy. "But it sounds completely reasonable, whereas reducing benefits sounds like an outrage."

Legislators weren't as brave as they pretended, however. They phased in the change so it would take place gradually, over 24 years. In fact, the higher age requirement first affects people born in 1938 -- who'll start turning 65 in 2003 -- and who'll have to wait until they're age 65 and 2 months to claim their full retirement benefits. Each year thereafter, that age will rise a bit. Born in 1956? Your full retirement age is 66 and 4 months. If 1958 is your birth year, your retirement age will be 66 and 8 months. Those born in 1960 and later will have a full retirement age of 67.

SOCK AWAY MORE? The implications are simple -- and stark. If you were born after 1938 and a big chunk of your income after you retire will be Social Security (for the average household in retirement, that figure is 46%, says Catherine Montalto, a consumer sciences professor at Ohio State University), you had better plan on working longer. Either that, or sock away plenty of extra money now, so that you can leave your job before you reach late-stage decrepitude.

And given the weak economy and plummeting stock market, that second step might be harder than you think. "Unfortunately, it's part of all the bad news that investors are looking at," says Robert Kreitler, who runs Kreitler Associates, an investment firm in New Haven, Conn. He adds that many of his clients who hoped to retire early are reassessing their plans -- not because the Social Security age is changing, but because steep stock market declines will leave them with less income in retirement than they want.

Their dilemma is heightened by the fact that, for now, jobs are getting harder to find. Unemployment rose to 5.9% in June, vs. 4.5% in July, 2001. And plenty of recent anecdotal evidence indicates that increasing numbers of older Americans are being asked to take early retirement by companies hoping to replace them with younger, lower-paid workers. Thanks to that pressure, says Deene Goodlaw, co-chair of the global benefits practice at law firm Pillsbury Winthrop in San Francisco, "early retirement is becoming quite a bit more common even as the Social Security retirement age is going up."

POORER RETIREES. Oddly, that may not change. Research shows that the availability of health insurance is a major factor in the decision to retire -- and it's still possible to get Medicare at age 65. Plus, federal laws covering employee retirement plans still require pensions to peg normal retirement age at 65. Currently, the average retirement age in the country is 64, according to the Social Security Administration (SSA).

The implication, then, is that the next generation of retirees is simply going to be poorer than the one that preceded it (see BW Online, 7/12/02, "A Good Time to Be Gray"). A September, 2001, study by Ohio State's Montalto found that increasing the Social Security retirement age wouldn't affect the average household's "retirement adequacy" as long as workers waited longer to retire. However, "if increases in the full retirement age are not accompanied by changes in [individuals'] planned retirement age, retirement wealth adequacy decreases across all households," Montalto writes.

This effect is magnified for those who retire early. For example, anyone born in 1960 or later who retires at 62 will have to accept a 30% cut in their normal benefit -- vs. the 20% cut absorbed by 62-year-olds whose normal retirement age was 65. That's nearly $500 less a month on a full $1,660 benefit -- the amount paid to people who were levied the maximum Social Security tax and are just now retiring at age 65. (The average monthly Social Security benefit across the workforce is $874).

STICKING AROUND. There's added injury for early retirees who live too long. If you retire at 62 and live to be 100, you'll get a lot less total Social Security than someone who started taking payments at 70 and lived to age 100 (since the latter get much higher monthly payments for working past full retirement age).

In truth, the Social Security system had little choice but to find a way to shore itself up, and raising the retirement age is more palatable than other options, says Gale. After all, men and women are living longer today than when Social Security was created. According to the SSA, in 1940 a man who reached age 65 had a life expectancy of 77. Now it's 81. Women who reached 65 were expected in 1940 to live to 78. Now they're also expected to live to 81.

The slow phase-in of the new rules was an effort to "give people plenty of time to prepare and understand that this change would take effect," says Mark Lassiter, a spokesman for the SSA, which in recent years has mailed annual benefit-projection statements to workers that highlight the impact of the age change.

FORGET RETIRING? Economists see plenty of good in the law. Not only does it bolster Social Security's finances but it should also encourage more baby boomers to work longer -- a necessity given the shortage of employees that could develop as the baby bust generation takes over, says Brookings' Gale. In fact, he expects more cuts to Social Security to be necessary, and notes that some proposals already call for raising the full retirement age to 70.

Kreitler thinks the concept of retirement might even fade away eventually. After all, the idea that people should be able to stop working and vacation for the last 20 years of their lives is a fairly new phenomenon in American society, he points out. "We have to be wealthy enough to afford that -- as a country and as individuals," he says.

Declining retirement portfolios and a rising Social Security age may not have flashed that message to most Americans yet. But you might as well face up to it now: Your working life may turn out to be longer than you once thought. By Amey Stone in New York


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