Social Security Formula Benefits the Rich & Penalizes the Poor

Here’s something that will surprise no one but Washington, D.C. bureaucrats – the vast majority of older Americans claim their Social Security benefits long before they reach age 70, incurring a penalty of more than 30 percent .

Roughly three-quarters of Americans claim benefits prior to age 70 because they are not working, need the money, fear Social Security will be cut and suffer from  poor health.

About 22 percent of older Americans have a gap of two or more years between retirement and claiming their Social Security Benefits. They rely upon employer-sponsored pensions and other savings to finance the delay.

These were the findings of a nationally representative survey on individuals’ claiming choices called Social Security Claiming Decisions: Survey Evidence. The survey was conducted by economists John B. Shoven of Stanford University, Sita Nataraj Slavov of George Mason University, and David A. Wise of the National Bureau of Economic Research.

SSA Claiming Age
Ages of those surveyed who had claimed Social Security benefits.

Social Security can be claimed at any age between 62 and 70, with individual claimants receiving significantly larger benefits if they wait.

Those who can afford to wait to claim benefits until age 70 win big – they receive the equivalent of an annuity that the researchers describe “as being better than actuarially fair.”

The real question is why does the Social Security Administration’s benefit formula reward the rich and penalize the poor?

According to the SSA, individuals who claim benefits at age 70 receive 132 percent of the benefit they would have received if they had retired at age 66. The difference is higher if the individual starts receiving benefits at age 62.

According to an article by Todd Campbell on MoneyWatch, a potential $1,000 Social Security payout at full retirement age (66) changes dramatically from age 62 ($750) to age 70 ($1,320). That’s a 76 percent increase over an eight-year period! It’s a windfall for those who can afford to wait to collect.

How can the Social Security Administration justify such a shocking disparity?

Theoretically, the Social Security formula is intended to encourage more people to remain in the workplace and reward those who do so.  And it is supposedly based on an algorithm that is tied to average life span – though that too is skewed against poor people who die earlier because they lack access to decent health care. But many, many Americans cannot remain in the workplace for many reasons, including age discrimination in employment. And many of the well-to-do winners in this unequal scheme do not remain in the workplace at all but merely live on their savings until they reach age 70.

There has been little – if any- research on how epidemic and unaddressed age discrimination in employment affects the age at which older Americans choose to retire and claim Social Security benefits. The term “age discrimination” is conspicuously absent from the report on the above survey, which is disappointingly general and surprisingly conclusory.

One thought on “Social Security Formula Benefits the Rich & Penalizes the Poor”

  1. Perhaps one possible solution would be to reduce or eliminate social security payments for high net worth individuals or for people with incomes over say $500,000 in order to increase benefits to those who begin claiming at 62? Re-balancing payment schedules should be a policy priority.

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