Column: How the rich get an undeserved windfall from Social Security
[LA Times] In a world where the rich always seem to get richer whatever the game, Social Security always seemed to be one program that was truly “progressive” — it benefited the working class more than the moneyed class. Right?
In reality, despite painstaking efforts to ensure that Social Security benefits are distributed fairly, the wealthy are receiving disproportionately large payouts after all. That’s the finding of a new study by Alicia H. Munnell and Anqi Chen of the authoritative Center for Retirement Research at Boston College.
The mismatch lurks within the adjustments made both when workers claim Social Security benefits early — that is, before their full retirement age — and late. Claim early, and monthly benefits will be reduced; claim late, and they’ll be raised. These adjustments aim to make the timing decision actuarially neutral: On average, total lifetime benefits should remain equivalent whether one claims before one’s full retirement age or later.
Munnell and Chen calculate that the actuarial adjustments are out of whack and favor late claiming. “As a result, they increasingly favor higher earners,” they write.
Munnell and Chen identify two culprits in throwing off the math: One is interest rates, which have been lower than experts at the Social Security Administration and on Capitol Hill anticipated when they set the differentials. (The early-retirement option was made available for women in 1956 and for men in 1961. The credit for delaying retirement was introduced in 1972 and recalculated in 1983, according to the authors.)
The second factor may be more significant: Average life expectancy is rising. As a result, retirees are collecting benefits for longer than the designers expected. Longevity is rising faster for wealthier individuals than middle- and lower-income workers, however, which is what makes late claiming more of a boon for the wealthy.
Before exploring the ramifications of these findings, let’s look at how early and late retirement affect Social Security benefits.