Waiting until age 70 to apply for Social Security has become a staple of retirement-planning advice because delaying until then gives a big boost to your monthly benefit.
But for many people, the advice is a non-starter. To work longer requires good health and good job prospects. To come out ahead by delaying Social Security requires living into your 80s; otherwise, you are generally better off taking a reduced benefit earlier and collecting for as long as you live.
The problem is that health, job prospects and longevity – like just about everything else in today’s economy — are increasingly tilted in favor of those who are relatively high on the income-and-wealth ladder. As a result, lower-income workers who are most reliant on Social Security are least likely to have the ability or opportunity to increase their benefit by working longer.
A new study by the Center for Retirement Research at Boston College looks closely at how socioeconomic status affects the timing of retirement. The researchers used education level as a proxy for status because educational attainment is determined early in life and affects options and decisions throughout one’s work life, but is unaffected by those decisions. Then, they measured the gap between the age at which people think they will retire and the age at which they will be financially ready to do so. Readiness is defined as having enough income in retirement to retain one’s pre-retirement life style.
It’s not surprising that households with the lowest socioeconomic status are far less prepared for retirement than other households. What is surprising is that the gap remains large even after controlling for race, health, marital status and other demographic and financial characteristics. The gap also remains large after controlling for shocks that may occur in one’s 50s when it is too late to recover financially, including severe illness or disability, divorce, unemployment and declines in wealth of 20 percent or more.
These results suggest that the big problem with early retirement is premature retirement among households with low socioeconomic status, the same group that has seen little improvement in health, longevity or job prospects.
The findings also suggest that all else being equal, educational attainment is an early indicator of future retirement readiness, or lack thereof. A sensible policy response would be to establish tax-favored retirement plans in jobs and industries that are most likely to have low-income, non-college educated workers, as some states have begun to do. Congress, in contrast, has generally acted only to make existing retirement plans more generous for high income savers by raising the amounts that employees can contribute and shelter each year.
Retirement policy is currently inadequate to foster, let alone ensure, financial security for the nation’s aging population. But the problem is not lack of knowledge about the issue. It is lack of political will to address it.