But even much more modest progress–extending healthy middle age from 60 to, say, 80–would permit significant shifts in retirement ages and allow for a longevity dividend that could go a long way toward preventing the looming pension meltdown. Greater progress might make the problem go away entirely. So perhaps it would make sense to steer some of the federal money currently going to research on treating the diseases of old age–an approach that leads to older, but frailer, people who are a drain on public resources and whose quality of life is iffy–to research on slowing or reversing the damage that aging does, leading to healthier old people who can work (and pay taxes) longer, while feeling better and enjoying life more.
So far, so good. But I think the key to solving the social security problem lies not only in deferring the age of retirement, but giving people an incentive not to collect on social security.
As the system currently stands, there is a slight monetary incentive in deferring social security payments from age 62 until age 67, because at the latter date one receives higher, “full” benefits. This incentive has been questioned by some, who argue that the time needed to catch up on the years of missed payments is not justified by the higher payments later. Regardless, this system at most creates an incentive to defer payments just a few years.
Why not create a system where there is an incentive to defer payments indefinitely. Allow retirees to decline to take payments, but have the funds set aside for the retirees to collect at a later date, even if 10 years later. This turns social security from a use it or lose it proposition, to a deferred savings plan. Given the time value of money, this will be of huge benefit to the problem of too much going out, but not enough coming in.
Take it even one step further. Allow the heirs of retirees to collect unused social security payments which have accumulated due to deferral. Turn social security not just into a savings vehicle, but also a way to leave money to one’s heirs. This creates an enormous incentive for retirees not to take social security payments, in the knowledge that their heirs will collect.
This system would not work any “unfairness” because the deferred social security payments could be treated as taxable income to the ultimate beneficiary at the time received, much like distributions from a 401(k) or IRA. Additionally, to the extent the funds accumulated and were part of the retiree’s estate, the funds would be subject to any estate tax. So the money will be taxed the same as if taken during the retiree’s lifetime, but the deferral of these payments by years or decades will be a significant benefit to the system.
This plan is the opposite of Obama’s social security plans which undermine “the foundation of social security by divorcing contributions from benefits, and converting social security tax contributions into a wealth redistribution mechanism.”
Change the incentives not only to live longer and healthier, but also to do so by giving retirees the option of saving for their heirs by not collecting social security payments during their lifetimes.