Social Security

Social Security Around the World II: Common Reform

The Gruber and Wise book evaluates how the following two reforms will affect a variety of OECD countries:

  • Delay official retirement age 3 years
  • “Common Reform”

The Common Reform is an option favored by many economists since it seeks to minimize the distortions of an individual’s decision of when to retire.  The four characteristics of the policy are:

  1. Set the normal retirement age at 65
  2. Allow early retirement between age 60 and 65
  3. For those who retire early, benefits will be reduced in an actuarially fair manner
  4. For those who retire late, benefits will be increased in an actuarially fair manner.

Gruber and Wise use 6% as the benefit reduction amount per year for those who retire early and also for the benefit augmentation amount per year for those who retire after 65.  This would not distort the retirement decision much if at all, since the net present value of both benefits would be the same for each individual. 

This seems like a complicated scheme, but is it worth the hassle?  Is early retirement really a problem? 

According to Gruber and Wise, in 1960 82% of Americans aged 60 to 64 were working or seeking work, but by 1995 this number dropped to 53%.  While this may seem like a steep decline, it is small compared to other countries who allow workers to collect social security at even earlier ages than the U.S.  For instance, Belgium had a labor force participation rate of over 70% for its workers aged 60 to 64 in 1960, but in 1995 this number had dropped to just below 20%.  Germany has seen a drop from above 70% to under 40% in the same time period.  Thus, the common reform, seems a sensible way to give the elderly a minimum level of subsistence, while reducing distortions in the retirement decision.