When to Retire: Your Most Important Retirement Decision by Barbara Butrica, Karen Smith, and Eugene Steuerle The Urban Institute The research reported herein was supported by the Center for Retirement Research at Boston College pursuant to a grant from the U.S. Social Security Administration funded as part of the Retirement Research Consortium. The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of the Social Security Administration or any agency of the Federal Government, the Center for Retirement Research at Boston College, or the Urban Institute, its board, or its funders.

Work Benefits the Economy National Income Increases More to share, no matter how distributed Personal Income Increases Wages, Social Security changes, employer benefits, and earnings themselves Taxes increase Social Security and income taxes, in particular Reduced pressure on other workers To support all government programs

Additional Labor: What Has Not Been Studied to Date Potential effect on earnings & income for the population Our own earlier work focused on a hypothetical earner Comprehensive measures of tax changes Social Security actuaries only measure Social Security taxes Combined effects of additional labor On income in retirement, Social Security shortfalls, and unified budgets

Useful Measures Additional earnings (including benefits) THE source of additional income All else is redistribution (transfers and taxes) Change in net retirement wealth Many rule-based redistributive elements Annuity value of wealth— Before and after additional work

Our Previous Finding: Social Security is Primarily a Labor Force Issue Few have private saving in excess of Social Security & Medicare wealth Replacement rates seem to dominate work effects…they often exceed 60%, 80%, even 100% at older ages.

Many people in their mid 60s can receive nearly as much income in retirement (hypothetical worker below)

Net income increases substantially by delaying retirement (hypothetical worker below)

Net retirement wealth increases with additional work ( present value from age 50 until death, beneficiary population in 2049 ) ($2006)

Percent Change in Average Annuity Income at Retirement by Lifetime Income Quintile --No Reforms: One and Five Year Work Effects Only--

Work & Reform Scenarios Examined OptionWork AdjustmentChange in EEA Change in NRA Baseline--- Part Work No Benefit Cut Work+5 before EEA  - Pure Work EffectWork+5-- Pure Benefit Reduction --  Part Work Benefit Cut Work+ 5 before EEA  Full Work Benefit CutWork+5 

Average Annuity Income at Retirement in 2049 (by Reform Scenario, $2006)

Average Change in Annuity Income at Retirement (by Reform Scenario, $2006)

Percentage Change in Social Security Deficit (Benefits Minus Taxes) in One Year Scenarios--

Percentage Change in Social Security Deficit (Benefits Minus Taxes) in Five Year Scenarios--

Cost to Income Ratio by 5-Year Reform Scenarios:

Change in Social Security and Unified Deficit in 2045 (billions $2006, excludes interest)) Baseline Pure Work Effect Pure Benefit Reduction Billions $2006 Change from Baseline (billions $2006) Social Security Deficit Unified Deficit -1, Social Security Benefits 4, Social Security Tax 3, Income Tax

Change in Social Security and Unified Deficit in 2045 by Source (billions $2006)

Additional Reforms Required Adjust private pension formulas Some households lose benefits with additional work Adjust Social Security actuarial formulas Benefit adjustments for work cause increased deficits with more work

Conclusions Retiring one year earlier has far more effect on most household’s portfolios than deciding where to invest their money Additional labor offers: Higher average income for the nation as a whole Additional protection in old age A way to minimize any benefit reduction in Social Security reform

Conclusions The earnings generated from ONE year of work are almost equal to the entire Social Security shortfall (of benefits from taxes) in 2045 The additional SS taxes generated by 5 years of work offset more than ½ of the 2045 SS shortfall, keeping total benefits constant The additional Social Security AND income taxes generated by 5 years of work—with no change in the benefit law—are substantially greater than Social Security shortfall In sum, at any given tax rate, any reform that increases work effort allows substantially higher levels of consumption for the population and higher Social Security benefits for retirees