Working longer is a commonly cited solution for a shortfall in retirement savings, but according to a policy note from the New School’s Schwartz Center for Economic Policy Analysis, it has a huge problem.
It won’t work for most people.
The reason, according to the note’s authors, is that most of the benefits from working longer and delaying retirement come from waiting to claim Social Security and receiving the program’s delayed retirement credit.
The research, led by New School economist Teresa Ghilarducci, is a new wrinkle in an ongoing debate over when to claim Social Security. The question is often framed as one of longevity. Americans who live longer, the argument goes, are most likely to age past the point where they break even on their benefits, and might actually get more out of them, even after delaying their claims. Those with shorter life spans, meanwhile, are better off claiming benefits at a younger age. The current conventional wisdom says it’s better for most people to delay claiming benefits until they’re at age 70, when the delayed retirement credit is at its largest.
Thus, past research implied that most Americans who worked until age 70, or at least until their late 60s, would be financially prepared for retirement. For example, research conducted in 2011 and spearheaded by Boston College’s Alicia Munnell, found that when Americans worked longer, a higher percentage of them were able to maintain their pre-retirement standard of living, rising from 11% at age 62 to 72% at age 70.
The Schwartz Center authors, however, refer to the past work as “spreadsheet studies,” and say their data suggests instead that when people work from age 62 to 70, the share of those prepared for retirement increases by just 18 percentage points—28 points less. Most of the gap between the studies was accounted for by Social Security.
The authors found that many Americans who work past age 62 are already claiming Social Security benefits to cover existing shortfalls in their income and are unable to save more during their additional working years. By age 66, 44% of workers who also claim Social Security report having less than $20,000 in financial assets.
The research questions whether delaying Social Security is a rational choice for most people, noting that by age 66, more than half of workers claiming the benefit are doing so because their labor market earnings are already lower than their projected Social Security benefits and income from other sources and assets.
In other words, postponing Social Security would result in lower annual income in a slim majority of households, said the researchers, and the benefits are often being used to smooth consumption over time.
While there are some low earners who might benefit from claiming Social Security benefits at a later age, the scant financial assets of many Americans make the decision to claim early “simple and correct” in the eyes of the researchers. Even if a person manages to remain in the workforce to age 70, only 41% will be able to maintain their pre-retirement standard of living throughout their retirement.
The Schwartz researchers furthermore found no evidence that older workers who claimed Social Security and continued to work were expanding their retirement lifestyles and consumption. In fact, this cohort spent a median of $42,000 per year when they could have afforded $49,000.
The researchers based their analysis on the Health and Retirement Study data for Americans born between 1931 and 1947. This ongoing study of economics, health, biomarkers, genetics and psychosocial content was originally founded in 1992 at the University of Michigan.