Actuarial Fairness of Early Social Security Retirement Benefits

Na Yin, Baruch College, City University of New York (CUNY)

Reductions in Social Security retirement benefits for take-up before the Normal Retirement Age (NRA) are often assumed to be actuarially fair for average-mortality Americans. We investigate to what extent past, current, and (planned) future penalty schedules adhere to this principle under different assumptions regarding age-specific mortality. Assuming moderate levels of discounting, the NRA 65 penalty schedule is found to be closest to actuarially fair for individuals who reached retirement age in the 1980s. For later cohorts subject to NRA 65, early retirement benefits have been increasingly less than actuarially fair. Following the 1983 Amendments, cohorts subject to NRA 66 and 67 will face more balanced schedules in the absence of future gains in mortality. We also investigate alternative retirement age reform scenarios and conclude with a discussion of the implications for optimal retirement behavior and the Social Security budget in light of recent benefit claiming patterns.