Social Security & working to an advanced age-Kotlikoff

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Social Security & working to an advanced age-Kotlikoff

Postby bobcat2 » Thu Feb 07, 2013 1:41 am

Here are excepts from an article by economist Larry Kotlikoff on the Social Security gain in benefits of working to an advanced age beyond 70.
The longer I work, the larger will be my Social Security benefits. This is due to Social Security's Recomputation of Benefits provision. Each year you work, you add to your earnings record leading Social Security to automatically recalculate your benefits.

In a nutshell, Social Security averages your highest 35 years of earnings to figure your Average Indexed Monthly Earnings or AIME. Then it plugs your AIME into a formula that figures out your full retirement benefit, called your Primary Insurance Amount (PIA). What benefits you can get for yourself and your spouse (including your ex spouse(s) and children, if they are young enough or are disabled) is all hooked to your PIA.

Social Security considers all your covered earnings from age 16 on and indexes, based on historic wage growth, all earnings through the year you are age 60. Earnings after age 60 are just treated at face value. So if you are now, say, 65, are still working, and you started work at 16, you have 45 years of indexed earnings and 4 years of non-indexed earnings. Social Security then takes the 35 largest of these values to compute your AIME.

If your current earnings are above the smallest of the 35 (ignoring this year's earnings) being used to form the AIME, bingo! You'll raise your AIME, which will raise your PIA, which will raise your Social Security check (checks, if your dependents are also collecting).

Is this a big deal? Well, I just looked at my own situation using my company's software. I didn't really start contributing much to Social Security until I was 29. I was in grad school before then and on a postdoc after grad school. If I were to stop working today and wait until 70 to collect benefits -- when they would start at their highest value, my lifetime benefits would be $774,210. (Lifetime benefits are calculated as the present value of benefits through age 100 discounted at a 3 percent rate above inflation.) If I were to work until age 70, my lifetime benefits rise by $80,312 to $854,522. If I work till 80, they rise another $88,154 to $942,676. Wow! Working to age 80 will raise my lifetime Social Security benefits by 22 percent!

Link - http://finance.yahoo.com/blogs/the-exchange/inside-social-security-obscure-incentive-keep-americans-working-224727054.html

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Re: Social Security & working to an advanced age-Kotlikoff

Postby sscritic » Thu Feb 07, 2013 2:14 am

Lifetime benefits are calculated as the present value of benefits through age 100 discounted at a 3 percent rate above inflation.

And if he lived to 200, the increase of working until 80 would be even greater. And just think if he kept working until 150!

He would get even bigger numbers if he didn't use a discount rate 3% above inflation. Why if he just used the inflation rate as his discount factor, the present value of his benefit until age 200 would be $8 million.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby Default User BR » Thu Feb 07, 2013 2:38 am

bobcat2 wrote:Here are excepts from an article by economist Larry Kotlikoff on the Social Security gain in benefits of working to an advanced age beyond 70.

Most of my investing purpose is arranging NOT to work beyond 70. Or beyond 60.


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Re: Social Security & working to an advanced age-Kotlikoff

Postby Levett » Thu Feb 07, 2013 7:45 am

"If I work till 80, they rise another $88,154 to $942,676. Wow! Working to age 80 will raise my lifetime Social Security benefits by 22 percent!"

Frankly, I'd rather play than work. That's my kinda "Wow!" :)

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Re: Social Security & working to an advanced age-Kotlikoff

Postby Grt2bOutdoors » Thu Feb 07, 2013 9:34 am

Levett wrote:"If I work till 80, they rise another $88,154 to $942,676. Wow! Working to age 80 will raise my lifetime Social Security benefits by 22 percent!"

Frankly, I'd rather play than work. That's my kinda "Wow!" :)

Lev


And if I worked until age 87, my benefit would rise an astounding 100%, but then of course the chances of me enjoying it will be very slim and all my hard earned benefits will accrue to the next generation.

Do we actually pay people to provide such enlightening advice? :confused
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Re: Social Security & working to an advanced age-Kotlikoff

Postby bobcat2 » Thu Feb 07, 2013 10:24 am

The fact remains that if you work beyond age 70 your SS benefits will continue to rise for life. I wasn't aware of that and I doubt if most people are aware of that. I realize many people do not want to keep working until an advanced age. Many other people do not want to save a large percentage of their income while working. But both of these options are matters of personal taste. If you do decide to work beyond age 70 there is a significant gain in the lifetime SS benefits of the household, particularly if you are the high earner of a married couple.

It looks to me like if he had calculated the PV of life time SS benefits to age 90 and used a lower real interest rate in the range of 1% to 2%, which would still be well above current real interest rates, then the lifetime SS benefits of working to age 75 would be more than double that of taking SS at 62. For one spouse doing this in a couple in the top ten percent of the income distribution, we are looking at a NPV gain likely in excess of $250,000 for the household. It takes a lot of tilting to small and value for most of us to get to an extra $250,000. :D

The bottom line? If work is fun or at least not awful, keep at it. Retirement can be awfully dull, and there is no guarantee that the grim reaper will make it on time. And for those who can keep working, know that Social Security may make it well worth your while.


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Re: Social Security & working to an advanced age-Kotlikoff

Postby VictoriaF » Thu Feb 07, 2013 10:37 am

bobcat2 wrote:The fact remains that if you work beyond age 70 your SS benefits will continue to rise for life. I wasn't aware of that and I doubt if most people are aware of that.

BobK


Even if people knew it, they would probably still choose their retirement date for other reasons.

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Re: Social Security & working to an advanced age-Kotlikoff

Postby sscritic » Thu Feb 07, 2013 10:38 am

bobcat2 wrote:The fact remains that if you work beyond age 70 your SS benefits will continue to rise for life.

BobK

This is not true.

Take 35 years of $100k a year from 30 to 65. Work 35 more years at $20k a year. Your benefit does not increase just because you keep working until age 100.

P.S. You do collect 35 years of $20k a year, but that has nothing to do with social security. That's called work.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby bobcat2 » Thu Feb 07, 2013 10:59 am

Hi sscritic,

People are well aware that they will be better off financially for the rest of their life if they work to age 75 rather than retire at age 62. They are probable not aware that just the change in SS benefits from starting benefits at 62 vs starting at age 70 but continuing to work until the mid 70s is in the hundreds of thousands of dollars and a big chunk of that comes not from delaying the beginning of benefits to age 70, but rather working beyond age 62 and even more by working beyond age 70.

If you enjoy your work and intend to work beyond age 70, then it's nice to know that SS provides you a significant increase in benefits for working beyond 70.

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Re: Social Security & working to an advanced age-Kotlikoff

Postby sscritic » Thu Feb 07, 2013 11:16 am

My point is that it depends on your covered wages. Mr. K states that:
If your current earnings are above the smallest of the 35

and that has to be true for every year you keep working if you want your PIA to increase for every year you keep working.

Note that if you work 10 more years and have already replaced the lowest 10 of the initial 35, the lowest of the current 35 will be larger than all of the previous lowest 10 and will thus be more difficult to replace (a higher salary).

Your statement about SS increasing every year you continue to work is not true without the proviso of higher salaries (not than of last year, but of the national wage index indexed salary of perhaps 35 years ago - or 25 years ago as of today if working 10 years from now).

Mr. K uses himself as an example (note that he likely makes twice the contribution and benefit base). He probably assumed his salary doesn't drop when he says "If I were to work until age 70" although he didn't state it in the portion you quoted. All I can say is "Ain't tenure great!"

My father worked into his 80s and for a while his SS increased, but then his salary dropped and his SS increases stopped. He didn't have tenure at a major university; I doubt that most Americans do.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby bobcat2 » Thu Feb 07, 2013 11:21 am

In my case what I earned in my 20s and 30s, adjusted for inflation, was a lot less than what I earned once I reached my 50s. I doubt if that is that unusual for people with degrees beyond the undergrad level. I suspect many people retiring at 62 would probably kick out a lot of low years if instead they worked into their mid 70s. This is particularly true, as Kotlikoff points out, for relative high earners, because the covered earnings ceiling keeps rising. I would imagine a lot of Bogleheads would be in this boat.

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Re: Social Security & working to an advanced age-Kotlikoff

Postby stlrick » Thu Feb 07, 2013 11:33 am

bobcat2 wrote:In my case what I earned in my 20s and 30s, adjusted for inflation, was a lot less than what I earned once I reached my 50s. I doubt if that is that unusual for people with degrees beyond the undergrad level. I suspect many people retiring at 62 would probably kick out a lot of low years if instead they worked into their mid 70s. This is particularly true, as Kotlikoff points out, for relative high earners, because the covered earnings ceiling keeps rising. I would imagine a lot of Bogleheads would be in this boat.

BobK



Is it the dollar amount of earnings that are used in the calculations or their relationship to maximum earnings subject to FICA tax? I have 35 years of earnings over the social security maximum and continue be over the maximum today, but the dollar amount I am earning each year is certainly much more than it was 35 years ago. Does 35 years at the maximum put an end to the benefit of continued employment or are my benefits continuing to rise because the dollar amount today replaces dollar amounts from 35 years ago?
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Re: Social Security & working to an advanced age-Kotlikoff

Postby bobcat2 » Thu Feb 07, 2013 11:44 am

stlrick wrote:
bobcat2 wrote:In my case what I earned in my 20s and 30s, adjusted for inflation, was a lot less than what I earned once I reached my 50s. I doubt if that is that unusual for people with degrees beyond the undergrad level. I suspect many people retiring at 62 would probably kick out a lot of low years if instead they worked into their mid 70s. This is particularly true, as Kotlikoff points out, for relative high earners, because the covered earnings ceiling keeps rising. I would imagine a lot of Bogleheads would be in this boat.

BobK



Is it the dollar amount of earnings that are used in the calculations or their relationship to maximum earnings subject to FICA tax? I have 35 years of earnings over the social security maximum and continue be over the maximum today, but the dollar amount I am earning each year is certainly much more than it was 35 years ago. Does 35 years at the maximum put an end to the benefit of continued employment or are my benefits continuing to rise because the dollar amount today replaces dollar amounts from 35 years ago?


That's a good question. I defer to sscritic on that one. Unfortunately for me, I was not in your boat for 35 years. I was barely in the water for some of those years. :D

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Re: Social Security & working to an advanced age-Kotlikoff

Postby mptfan » Thu Feb 07, 2013 11:48 am

My understanding is that if you have 35 years of earnings that are at the maximum social security level, then you will get no additional benefit for working more years. I will defer to sscritic to correct me if I am wrong.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby ObliviousInvestor » Thu Feb 07, 2013 11:53 am

My understanding is that it's the 35 highest-earning years (with each year being capped at the maximum taxable wage amount), after adjusting each year for wage inflation.

Since the maximum taxable amount has been indexed for wage inflation for a good long time now (1972?), if you have 35 years over the maximum, there probably won't be a significant increase for working any additional years at the maximum. (There might be a very small increase as a result of replacing years in which the maximum was rounded down more than in other years, I think.)

However if some of your 35 years at the maximum are from prior to the point at which the maximum was indexed to inflation, then additional years at the maximum should result in an increase.

Edited to add:
http://www.ssa.gov/history/1972amend.html

Looks like it was 1972 in which the law was passed that indexed the maximum taxable amount to inflation. But the changes from 1972-1974 were made up in advance, not based on actual wage inflation. Whether they turned out to be more or less than actual wage inflation over those years, I don't know. :-)
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Re: Social Security & working to an advanced age-Kotlikoff

Postby sscritic » Thu Feb 07, 2013 11:59 am

Part of the effect you are seeing and that Mr. K sees is a historical artifact. Prior to year (?) the contribution and benefit base was not indexed to the national wage index as it is today. It would have one value for three years, then jump, then get stuck, then rinse and repeat. It makes a difference for this Mr. K and that Mr. K because they earned more than the C&BB every year.

Let's look at a average worker, all of whose wages were at the national average wage (which is below the C&BB). When indexed, every one of the years of earnings up to age 60 is exactly the same. That's what indexing does. If you were average at age 30 and are average at age 60, the indexing adjusts your average age 30 to be the same as your age 60 average. Someone turning 62 in 2013 will have 35 years of $42,979.61. If her salary goes up to $43k and then another 0.5k a year for the next 7 years, those 8 years will replace 8 years of $42,979.61. My spreadsheet gives me an increase of $14,163.12 going into the calculation. Divide by 35 and then by 12 and the increase in the PIA is $33.72 or $404.66 a year at FRA. Meanwhile, the 8 extra years of work yielded [$458,000 this can't be right, but I already deleted my spreadsheet - let's say roughly $45k a year for 8 years or $360 - maybe I typed a 4 when I wanted a 3. I used a 3 below.]

I think you have to look at the size effects. You get $358,000 from working 8 more years and your social security goes up by $404 a year for life inflation adjusted. Which looks bigger to you?
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Re: Social Security & working to an advanced age-Kotlikoff

Postby sscritic » Thu Feb 07, 2013 12:04 pm

stlrick wrote:Is it the dollar amount of earnings that are used in the calculations or their relationship to maximum earnings subject to FICA tax?

The latter. You are credited with your earnings up to the max (contribution and benefit base in formal terms). Make six times the max, and only one of them counts, the first max.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby sscritic » Thu Feb 07, 2013 12:08 pm

mptfan wrote:My understanding is that if you have 35 years of earnings that are at the maximum social security level, then you will get no additional benefit for working more years. I will defer to sscritic to correct me if I am wrong.

As long as the national average wage continues to increase, then the contribution and benefit base (the max counted) will also increase. So if you keep earning the max after age 60, meaning higher and higher salaries, your PIA will increase, but only to the extent the new contribution and benefit base is higher than what is was when you were age 60.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby the beerdrinker » Thu Feb 07, 2013 12:51 pm

Bobcat, I think you should work to age 80 and collect the extra benefit for 2 reasons. One, you managed postponing work 'til almost 30 (Wow !!!) thereby contributing nothing to the SS "lockbox" for > 10 years; and Two, the time you've spent calculating possible additional benefits would not have been wasted. Ooogy wawa!
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Re: Social Security & working to an advanced age-Kotlikoff

Postby cbeck » Thu Feb 07, 2013 9:27 pm

It's true for Kotlikoff because he is a university professor. He can keep working secure in the knowledge that his employer is not going to reduce his salary, so his best 35 year income will keep increasing. For many people who extend their working career, however this is not true. For instance, people who got laid off and had to find a new job. Or retirees who want part-time work.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby singletond » Fri Feb 08, 2013 10:47 am

I postponed taking SS until 70 and retired a couple of years after. It is inflation adjusted, so yes it grows in that sense (but not real terms), and earnings in those last couple of years also increased it in real terms.

And for Brits who have a UK social security number and worked over there the UK payment (phone them on +44 191 218 7777) is inflation adjusted, but varies with the exchange rate. One of the blessing of the UK system is that my wife receives a UK SS payment despite the fact that she never lived in England. Also when I applied for the UK pension I had not been contributing for 20 years but was able to back pay for the previous few years. The benefit was a catch up check from the UK (almost exactly the same as the back pay I sent them) plus a few % rise in the UK pension! And it would not surprise me if other European countries offer something similar.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby caroljm36 » Fri Feb 08, 2013 2:34 pm

Well, here I had thought that the benefit stopped increasing after 70 whatever your income was ? I still won't have 35 good years of decent income by then, only about 32.

I'd just as soon have some structure in my day, though there hasn't been much to do at my job in years.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby chaz » Fri Feb 08, 2013 2:40 pm

I started SS at 70 and retired at 74. The SS did kick up each year as related in earlier posts. Nice.
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Re: Social Security & working to an advanced age-Kotlikoff

Postby mptfan » Fri Feb 08, 2013 3:01 pm

sscritic wrote:
mptfan wrote:My understanding is that if you have 35 years of earnings that are at the maximum social security level, then you will get no additional benefit for working more years. I will defer to sscritic to correct me if I am wrong.

As long as the national average wage continues to increase, then the contribution and benefit base (the max counted) will also increase. So if you keep earning the max after age 60, meaning higher and higher salaries, your PIA will increase, but only to the extent the new contribution and benefit base is higher than what is was when you were age 60.

Ok, so let me see if I understand... If you already have 35 max earning years, and you stop working, then your PIA will be fixed and it will not be adjusted for inflation. But, if you continue to work and earn the social security maximum, then your PIA will increase slightly each year due to inflation?
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Re: Social Security & working to an advanced age-Kotlikoff

Postby YDNAL » Fri Feb 08, 2013 5:55 pm

bobcat2 wrote:Here are excepts from an article by economist Larry Kotlikoff on the Social Security gain in benefits of working to an advanced age beyond 70.
Is this a big deal? Well, I just looked at my own situation using my company's software. I didn't really start contributing much to Social Security until I was 29. I was in grad school before then and on a postdoc after grad school. If I were to stop working today and wait until 70 to collect benefits -- when they would start at their highest value, my lifetime benefits would be $774,210. (Lifetime benefits are calculated as the present value of benefits through age 100 discounted at a 3 percent rate above inflation.) If I were to work until age 70, my lifetime benefits rise by $80,312 to $854,522. If I work till 80, they rise another $88,154 to $942,676. Wow! Working to age 80 will raise my lifetime Social Security benefits by 22 percent!

Link - http://finance.yahoo.com/blogs/the-exchange/inside-social-security-obscure-incentive-keep-americans-working-224727054.html

BobK

Working "till 80" for 22% more PV of benefits gets you 33.3% (or more) closer to DEATH. :)

Assuming one lives to 100:
Age 70 -- 30 years and drop dead
Age 80 -- 20 years and drop dead <-- -33.3% remaining assumed life

Mr. Kotlikoff, choose your tradeoff wisely - the 10 years from 70-80 can't be priced using "the company's software" !!!
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Re: Social Security & working to an advanced age-Kotlikoff

Postby afan » Sun Feb 10, 2013 6:23 pm

I have some time, and I don't know the SS rules well enough to do this, but it seems the calculations described do not properly account for the risk that one may die and forfeit future SS benefits and do not separate the "stop working" decision from the "start receiving benefits" decision.

I would think one would want to pick a projected retirement age, say 75 for me.
Then estimate at what age one would have 35 years of income at the SS maximum (65 for me). It appears that the benefit would not further increase, in spite of working another 10 years with income above the maximum.
Estimate life expectancy, first using crude average expectancy tables, then adjusting this for individual health status and risk factors.
Generate a set of probabilities of surviving to age X. Discount future cash flows to reflect increasing uncertainty of receiving the benefits at progressively later ages. Or use a single discount rate, but multiple the cash flow by the probability of surviving to receive it. Adjust each cash flow to reflect benefits lost due to a high income while working, and tax implications both before and after retirement.

Use this information create a series of spreadsheets showing the net present value of starting SS benefits at each age from 62 to 70. If I understand the system, there would not be a benefit to delaying past 70, but as I said, I don't know the rules.

None of this requires predicting the future of the SS system or future benefits reductions or means testing. One probably should run the scenarios again reducing the expected benefits by a range of amounts to reflect the possibility that these losses may occur.

At that point, one would try to identify the age at which starting benefits maximized the NPV. This will be the same as maximizing the amount left to spouse and offspring, since after tax SS benefits will reduce, dollar for dollar, consumption of assets for expenses.

But I don't know of anyone who has combined the SS rules with the financial analysis. Does anyone here know of such an approach?
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Re: Social Security & working to an advanced age-Kotlikoff

Postby Electron » Thu Sep 19, 2013 5:58 pm

I found this thread very interesting and it confirmed something that I recently tested with the ANYPIA program. I suspect that many individuals are not aware that their benefit can continue to increase after age 70, and also after full retirement age which is 66 for recent retirees.

The increase in benefit is certainly logical since a worker will pay into the Social Security system every year that they work. If they do not increase their high 35 year average earnings, then their extra payments will not benefit them.

I tried an example with the ANYPIA program and could see the Primary Insurance Amount (PIA) increase as a person worked well beyond age 70. Unfortunately the program only shows the most recent PIA along with the PIA at eligibility and possibly entitlement. It's too bad that they can't list the whole history of the PIA for each working year that it increased.

Regardless, ANYPIA is quite a sophisticated program that will work right back to the inception of Social Security in the late 1930s to 1940. I tried some sample cases for an individual born in 1912, 1923, 1933, and 1943. Later I discovered that one of the sample files included with the program is for an individual born in 1887.
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