Retirement & Financial Planning Report

Report: The actuarial adjustment schedule does not appear to be perfectly fair for all beneficiaries. Image: J.J. Gouin/Shutterstock.com

While Social Security’s formula paying either reduced or enhanced benefits is touted as working out the same overall, certain categories of workers of individuals tend to come out ahead or behind, according to a report for Congress.

The Congressional Research Service was examining the formula under which those claiming earlier that the “full” retirement age receive benefits lower than they would have received if they had waited until that age and those who claim later receive boosted benefits. The reduction applies on a phased basis for those claiming benefits between age 62 and full retirement age—which this year is 66 and four months—and a phased in increase applies to those waiting to claim from that age until age 70, after which there is no further increase.

The reduction on the front end varies from 20 to 30 percent by year of birth because of the phased-in increase of the full retirement age; that age is 66 and four months for those hitting that age this year. If such a person had started drawing benefits at age 62, the reduction would have been about 27 percent. The increase on the back end is 8 percent per year.

“These benefit adjustments for early and delayed claiming are intended to provide the worker with roughly the same total lifetime benefits, regardless of when he or she claims benefits, based on average life expectancy—also called actuarial fairness. Because of this, theoretically, claiming behavior for average-mortality beneficiaries will not affect program outlays in the long run,” the report said.

However, “because an individual’s mortality may differ from the population average, the actuarial adjustment schedule does not appear to be perfectly fair for all beneficiaries. The actuarial factors may advantage one group relative to another by gender, income level, and other measures,” it said.

“For example, research has found that late claimers of Social Security benefits have higher lifetime earnings and lower mortality than those who claim at age 62, and the benefit increase from delayed claiming is larger for those with higher lifetime earnings because their delayed benefits exceed the actuarially fair amounts (which are based on workers with average life expectancy). Some researchers maintain that this may undermine the redistributive element built into the Social Security benefit formula, which replaces a higher proportion of career-average earnings for low earners than for high earners,” it said.

In addition, because women on average live longer than men, research has shown that “early male claimers enjoyed an actuarial premium, while early female claimers faced an actuarial loss.”

The report also noted that the adjustment factors were set more than four decades ago based on life expectancy and interest rates at the time of enactment and have not been changed since.

“Some researchers argue that the actuarial adjustment factors should be updated to reflect the increase in longevity and the decline in interest rates. Specifically, a longer life expectancy and a lower interest rate will call for a smaller actuarial adjustment—reducing the early claiming penalty and lowering the credit for delayed claiming,” it said.

While the CRS does not recommend policy changes, it said that Congress might want to consider updating the factors periodically based on changes in life expectancy and interest rates and/or altering the factors based on differential mortality rates by income or other factors.

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