Early Retirement

Solution : Means-Test Early Retirement

Early retirement is a poor fit in a pension system.  Early retirement in Social Security introduces serious financial problems into the system, and creates poor incentives for retirees.  Whatever value is created by early retirement could probably be address in a different program.  

This change would mean that people with outside resources couldn't use this option. 

The Problem With Early Retirement:

Social Security offers an option for retirees to retire before full retirement age.  This option is very expensive not only for Social Security but the nation as a whole.  It provides incentives for workers to retire early.  As Andrew Biggs reports :

"The third major problem is that (Social Security) tends to induce workers to retire earlier -- again undermining the economy. Back in 1950, the typical American claimed Social Security benefits at age 68 and lived to around age 76. Today, the typical American retires at age 63 and can expect to survive until age 83, meaning that person will spend roughly one-third of his adult life in retirement. Reversing this trend toward early retirement is perhaps the best solution to the fiscal pressures created by the aging of our society."

Reduces Social Security High-Margin Contributions:

Early retirement by workers cost Social Security high-margin contributions. The benefits formula uses only the highest 35 years of contributions. Consequently work years 36 and after provide very little lift to the final benefits payable. It can be free money to the system.

Introduces Adverse Selection:

Adverse selection is the process in insurance which picks your most unprofitable customers.  In the case of early retirement, the option will allow sick people who would not collect OLD-AGE insurance to collect.  That is fine, but understand it costs the system a lot of money. 

Reduces Income Taxes:

Early retirement encourages workers to trade income tax producing jobs for pensions which are exempt from income taxes. While the IRS collects revenue on Social Security benefits, the money is returned to the Social Security system. No revenue collected by the IRS on Social Security benefits is available for the general fund.

Reduces The Economy:

When people retire, they consume less which will feed through to the economy.  This affects jobs in the general economy. It affect income tax collections.

Creates Terrible Incentives:

This option creates an potential short-term vs long-term trade-off in which the worker trades immediate gratification over his long-term needs.