The Disincentive to Working Longer

Continuing to work seems like an easy solution to a retirement shortfall, but it’s not that simple, say experts.

By Eleanor O'Sullivan

Does it make financial sense for people in the U.S. to work longer than 35 years?

That question was an important part of a debate on longevity and diminishing public resources at the 2021 Century Summit, a virtual conference recently held by The Longevity Project in collaboration with the Stanford Center on Longevity.

During the session “Funding Longer Life,’’ panelists C. Eugene Steuerle and Sita Slavov talked about reforming Social Security and Medicare, which account for nearly 40% of the federal government’s spending budget and run major deficits. Steuerle, a former deputy assistant secretary of the U.S. Department of the Treasury for Tax Analysis, is a fellow at the Urban Institute. Slavov is a professor of public policy at George Mason University’s Schar School of Policy and Government.

The Beyond-25 Hitch

Moderator Martha Deevy, associate director of the Center, said working longer has been considered “an easy solution’’ to running out of money in retirement, but there are disincentives to working longer. Slavov and Steuerle expanded on that.

“There’s an issue for older people in that Social Security benefits are based on the highest [earning] 35 years,” said Slavov. “And when you calculate that average, you average in zeros if someone’s worked for less than 35 years. So once someone hits that 35 years of work, an additional year of earnings is only going to affect their benefits if it’s high enough to displace one of the first 35.”

“And even if it does displace one of those first 35 years, it’s going to be displacing a year with positive earnings, not zero earnings,” she continued. “So working additional years beyond 35 often has very little impact on your Social Security benefit. And at that point, you’re just paying the payroll tax and it’s not really being offset by earning additional benefits, meaning it’s going to discourage work to a greater extent and that’s kicking in right at the stage of life when retirement is a realistic option for people.’’

While working past 35 years might not add much to monthly Social Security payments, waiting to claim them often does. Some people continue to work to put off claiming. Others who stop working come up with strategies to live off their investments, often devised by financial advisors, and wait to claim Social Security until their full retirement age or age 70.

In the Pipeline

Slavov added academics are having conversations about how to resolve the disincentive of working longer years versus the problem of diminishing public resources, but these conversations need to be converted into public policy.

Steuerle said the biggest disincentive is actually the signal people get as they age. “Simply telling people that all of us are old at 62 without adjusting for the fact that we have longer and longer lives and are healthier is a powerful signal. Typically now, the average person retires for close to 20 years and the average couple is approaching three decades of Social Security. Defining when is a normal retirement age — even if you didn’t change the benefit structure at all, for instance — could have a very meaningful effect. (And) I should say, by the way, real quickly. It’s mainly higher income people that are working longer, so we still have a lot of fear in terms of all of these signals and disincentives that we’re dealing with,’’ Steuerle said.

The Argument for Reform

Deevy also asked for ideas on reforming Social Security and Medicare.

“To ensure the stability of Social Security and Medicare, I would start by saying definitely don’t expand them without comprehensive reform because there have been some proposals to do just that. Now, I do think ultimately, benefits should be increased for certain vulnerable groups, but that needs to happen alongside comprehensive reform that cuts overall costs,’’ Slavov said.

“And raise revenues. I do think we could consider some piecemeal changes to improve work incentives, like repealing the earnings test, for example, which people tend to see as a tax. It’s not really a tax because they withhold benefits from you if you work when you’re below full retirement age and receiving benefits. And you do get those benefits back later. But people don’t seem to understand that very well.

“And I like this idea of trying to reframe things, you know, there’s this age that is designated the full retirement age, which is, you know, 66 or 67 depending on your birth year, but that age is kind of arbitrary. You can claim Social Security benefits anytime between 62 and 70. And there’s research that shows that people do tend to retire around that age that’s designated the full retirement age, so we could do some relabeling, maybe call 70 the full retirement age and call everything else a penalty for retiring early, right. So that doesn’t change the benefit structure at all. But maybe it really labels things,’’ Slavov said.

Steuerle said that re-distributing government subsidies would help the people most in need.

“A lot of our work is showing the squeeze that we put on working families, on people of color because we’re really not addressing a lot of the sources of their own wealth inequality. And income inequality among other young (people) where the disparities in income and wealth are also growing greatly.”

He added that less money is devoted today to programs that would promote  mobility and growth for people. “Such as work subsidies. And even in areas like retirement, and housing, where most people own half their assets. Most of the subsidies go to high- income people and the subsidies for low- and middle-income people basically all simply go for health and retirement,’’ he said.

“I want to cut back on the size of government, but I’d like to see it distributed more to other parts of the lifecycle because I think that’s having all sorts of negative effects. So I can’t think of just Social Security and Medicare in isolation, even though they are running larger and larger deficits that have to be dealt with,’’ Steuerle said.

In a four-decade career in journalism, Eleanor O’Sullivan has reviewed many books on best practices for financial advisors, has written for Financial Advisor and the USA Today network, and was movie critic for the Asbury Park Press.

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