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Employees often ask whether they are better off delayingretirement or retiring early, before they reach full retirementage. Different people answer that question differently.Those at lower income levels may have no choice but tostart drawing Social Security benefits at age 62, the first yearthey can, while those at higher income levels may be able to waituntil they hit 70.

Social Security benefits increase the later they are claimed,but now a paper by the Center for Retirement Research at BostonCollege cites key factors that may mean actuarial tables for SocialSecurity benefits may be unfair. Interest rates are low, lifeexpectancy has increased, and longevity improvement is greater forhigher earners than for lower-paid employees. Based on thesefactors, authors Alicia H. Munnell and Anqi Chen analyzed whatneeds to change to keep Social Security benefits fair across theboard.

Today, individuals claiming benefits at 62 make approximately 20percent less per month than those who claim benefits at fullretirement age—65 for those born in 1954 or earlier, 66 and twomonths if born in 1955 or later. In 1972, Congress allowed retireesto delay claims up to age 72. That was later reduced to age 70.Today, the annual "bonus" for any delay after full retirement ageis 8 percent per year in additional benefits.

In developing their own actuarial table, the researchers foundthat "the actuarial adjustment factors have remained constant overseveral decades." But other factors have changed to alter thefairness of the scheme.

First, life expectancy has increased. For example, women's lifeexpectancy today is five years longer than it was in 1956.Researchers found that those "who claim at 62 instead of 65 wouldincrease their lifetime benefits by 14 percent. This smallerpercentage increase suggests that a smaller reduction for earlyclaiming would be required to keep costs constant across claimingages."

Second, because the cost of lifetime benefits is impacted byinterest rates, which have declined since the 1980s, researchersfound that "longer life expectancy and lower interest rates work inthe same direction. In both cases, reducing the penalty for earlyclaiming and the reward for later claiming would better align thecosts of early and late claiming."

Finally, people at different levels of the earning spectrum havedifferent life expectancies and claiming behaviors. Those who have"more money tend to live longer. Moreover, in recent decades,higher earners have enjoyed most of the gains in lifeexpectancy."

In addition to living longer, higher earners also typicallyclaim benefits later. Of all those who claim benefits after theirfull retirement age, 40 percent are in the lowest quartile forlifetime earnings, while 51 percent are in the highest.

The bottom line, according to the researchers, is that actuarialadjustments haven't kept up with changes in other factors. As aresult, the "reduction for early claiming is too large, while thedelayed retirement credit—initially too small—is now about right."That said, the current adjustments "both between 62 and 65 andbetween 65 and 70, favor delayed claiming. As a result, theyincreasingly favor higher earners."

From: ThinkAdvisor