Unbiased Analysis of Today's Healthcare Issues

Social Security Around the World II: Common Reform

Written By: Jason Shafrin - Jul• 03•06

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.


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  1. BC says:

    Under our Social Security reforms enacted in 1983 based on the Greenspan Commission recommendations, the normal retirement was gradually increased beginning in 2003 until it reaches 67 in 2027. Currently, for those born between 1945 and 1954, the normal retirement age in 66. One can retire as early as age 62 with benefits reduced by 20% for those retiring at 62, 13 and 1/3% at 63 and 6 2/3% at 64. Comparable bonuses are paid for those who defer retirement until as late as age 70. The bonuses and penalties were specifically set to be actuarially neutral.

    While both Social Security and Medicare are moving toward insolvency (especially Medicare), there is no shortage of ideas on how to fix the system, though raising the normal retirement age by 3 years (to 70 in 2027 instead of 67) is one of the least popular.

    Small changes like basing the initial benefit on the worker’s highest earning 38 years instead of the current 35 and taxing all benefits as ordinary income once the beneficiary has recovered his or her nominal dollar lifetime contribution would probably be more palatable.

    Medicare will likely ultimately be addressed as part of a move toward national health insurance financed by higher payroll and, perhaps, other dedicated taxes (VAT?) combined with systematic rationing of expensive end of life care. Just my opinion, of course.

  2. BC says:

    Correction to earlier comment: The early retirement discount for those whose normal retirement age is 66 is as follows:

    Age 62 — 25%; age 63 – 20%; age 64 – 13 1/3% and 65 – 6 2/3%.

    For those born in 1943 and later years and choose to delay retirement, the benefit increases by 8% per year beyond the normal retirement age until age 70 when it is maxed out.