One weird trick to shore up Social Security’s finances (really)

What to do about the long-term funding shortfall in Social Security is one of Washington’s perennial policy debates. Unless the economic growth rate ticks up unexpectedly, there will need to be unpopular tax increases or even-less-popular cuts in benefits.

But Raimond Maurer, Olivia Mitchell, Ralph Rogall, and Tatjana Schimetschek have a new paper out arguing that there’s something like a free lunch — albeit a rather small one — to be had from a relatively minor tweak in how the program works. To improve Social Security’s finances, they argue, all we need to do is offer people a lump-sum bonus for retiring later rather than the current practice of increasing the value of your monthly check.

Even though you hear people talk about “the” retirement age, current practice is that a person can begin collecting Social Security benefits as young as 62 or as late as 70. And the monthly check you receive is a function of both how much you paid in payroll tax when you were working, and how early or late you claim benefits. The earlier you start collecting Social Security, the smaller your check.

When people propose raising the retirement age they are proposing, in effect, to increase the penalty for claiming benefits early at 62.

The paper argues that you don’t actually need to cut benefits in order to persuade people to work longer and bolster Social Security’s finances. All policymakers would need to do is switch the program design. Make people eligible at 62 for the exact benefits that they are currently eligible for at 62. But tell them that if they delay receiving benefits until later, they will get extra money. Not in the form of a small increase in the monthly check, but in the form of a single bonus payment. The idea is that the bonus payment should be “fair” — equal in value to the expected lifetime bonus under the current system.

The authors surveyed members of the RAND Corporation’s American Life Panel to see how people say they would respond to lump-sum payments. They find that depending on the details of program design, people would delay retirement by 6-8 months and spend the majority of that time working.

Since the benefits would be actuarially fair, this would not save the government any money. But since people would be working longer, the overall size of the economy and the tax base would be larger. That extends the life of the Social Security Trust Fund, and helps delay the moment at which benefit cuts or tax increases are necessary. The overall scale of the change is not enormous, but it’s distinctly positive and it’s hard to see what the downside would be.