70 is the new 65

When Social Security was first instituted in 1935, the retirement age was set at 65. Some cynics have argued that 65 was chosen as the age at which benefits would begin because life expectancy in 1935 was only 61.7. But life expectancy at birth took into account the high rate of infant mortality in the early 20th century. In 1935, men who made it to age 65 could look forward to another 13 years, women another 15 years, on average.

The German retirement system, which preceded ours, initially set 70 as the retirement age; later it was lowered to 65. By 1935, the Committee on Economic Security (CES) proposed age 65 as the retirement age under Social Security, partly because many public and private pension systems were using it, and partly because it would produce an actuarially sound system that would require only modest levels of payroll taxation.

In the 1950s and 1960s, first women, and then men, were allowed to start benefits at 62. An adjustment was made in the benefit amount to account for the fact that early claimers would receive benefits over a longer period of time.

In the early 1970s Congress introduced the delayed retirement credit (DRC), which increased monthly benefits for those who claimed after the full retirement age of 65. This credit was phased in over a long period of time and now raises the benefit by 8% per year between full retirement age—now 66—and age 70. At this point it is actuarially fair—that is, for a person with average life expectancy, there is no difference between claiming at 62 and claiming at 70.

In her brief, “Social Security’s Real Retirement Age Is 70,” Alicia Munnell asks, “Is 70 the ‘right’ age?” If 65 was the right age in 1940, what is the right age today, given the increase in life expectancy? By 2015, life expectancy for 65-year-old men will be 19.3 years and for women 21.6 years, an increase of nearly 7 years. If it is assumed that these gains in life expectancy will be divided between work and leisure in the same proportion as the rest of a person’s life, it would point to a “right” retirement age of 70.

But does an age-70 retirement feel right for most people? Current work patterns suggest that it is starting to. Currently about 30% of men are employed at age 70. This percentage has risen substantially since 1985 due to several factors. These include the shift in employer pensions to defined contribution plans (defined benefit plans encourage retirement age 65), workers’ rising educational levels, improved health, the trend toward less physically demanding jobs, the decline of retiree health insurance, and the desire to stay actively involved in the workforce. These factors could continue to raise the retirement age.

On the other hand, declining health or a changing economy might suggest a lower retirement age for some people. The Employee Benefit Research Institute, found that 47% of workers retired sooner than they expected to. Of these, 55% did so for negative reasons, such as health problems or a disability. Interestingly, 69% of workers said they expected to work for pay in retirement, but only 25% actually did so.

But what does “retirement age” really mean, anyway? Is it the age a person transitions from primary career to a post-retirement career such as consulting or part-time employment? Is it the age a person quits working for good? Is it the age a person files for Social Security and/or Medicare? Is it the age a person stops saving for retirement and begins drawing down assets to meet current spending needs? Retirement is starting to look like a process that generally begins in the early 60s and continues into the 70s and even 80s. All along the way decisions must be made about:

  • How and when to leave current employment and what will come next—different employment? No paid employment?—and whether that might change in the future.
  • How spending needs might change—will there be an increase in spending for travel and leisure, or a decline in spending to accommodate a reduction in income?
  • What to do about health insurance—65 is still the age for Medicare, but people who continue to work for larger employers (20 or more employees) may stay on the employer plan and delay Medicare until they leave employment.
  • When to file for Social Security benefits—this can be done anytime between age 62 and 70 and does not have to coincide with the termination of employment.
  • How to manage the drawdown of retirement assets to generate income over remaining life expectancy. (Note: average life expectancy should not be used for this purpose since half of all people will outlive the average life expectancy of about 84 for men and 87 for women. The withdrawal plan should address longevity risk, or the risk of living to age 95 or 100 or even longer.)

Social Security is one of the few sources of retirement income that addresses longevity risk. For this reason, it pays to maximize Social Security income in the later ages, when other sources of income, such as paid employment or retirement account withdrawals, have either stopped or dwindled down. “Most people do not understand the relationship between claiming age and monthly benefits,” says Munnell in her brief. “Given that Social Security is a particularly valuable type of income—inflation adjusted and lasts for a lifetime—it generally makes sense for workers to postpone claiming as long as possible to get the highest monthly amount, assuming they are in good health for their age.”

Although most clients understand the fluidity and drawn-out nature of retirement today, many of them are still anchored to 62 as the age for claiming Social Security benefits. Influenced by their friends, by Social Security solvency scares, or by the desire to have a little extra income, nearly half of all people start Social Security sometime before their full retirement age. They know they’ll get more if they wait until 70, but they’re not convinced it’s worth it. 62 still stands out as the age for collecting Social Security benefits.

What Munnell and other retirement experts are trying to do is reset the anchor to 70. What if baby boomers started thinking of 70 as the normal retirement age with any age earlier than that being considered early retirement? Not only would they be assured of receiving the maximum Social Security benefit, they might also delay their employment termination date and pump that much more money into their retirement savings accounts. With life expectancies increasing, they’re going to need it.

The second most common question that comes into office (after “Can I start my spousal benefit at 62?”) is “I started my benefit at 62 and now regret the decision. Is there anything I can do?” Many baby boomers start benefits at 62 because it seems like the thing to do. Then they call my office, come to my Social Security seminar or read the personal finance literature which overwhelmingly recommends delaying benefits to 70, and the light bulb goes on. It hits them that early claiming will leave them shortchanged over their lifetime and give them lower income in their later years.

Eventually we will all think of 70 as the “right” age for retirement (regardless of when retirement actually happens). But because this shift in perception may not occur in time for today’s 62-year-olds to avoid making irrevocable claiming mistakes, it is more urgent than ever that we reach out to baby boomers with the compelling argument that delaying benefits will give them more income when they’re going to need it most—at the end of retirement, not at the beginning of it

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