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Have We Finally Achieved Actuarial Fairness of Social Security Retirement Benefits and Will It Last?

Author

Listed:
  • Frank W. Heiland

    (City University of New York, Baruch College)

  • Na Yin

    (City University of New York, Baruch College)

Abstract

This paper develops a framework to analyze the actuarial adjustments faced by American workers who claim Social Security benefits before or after their Full Retirement Age (FRA). We derive the conditions under which these adjustments are “actuarially fair” (or “neutral”) and develop measures to characterize the devi- ation from the fair form. Fair adjustment schedules are increasing at an increasing rate in take-up age and become flatter as longevity rises. We document that the actuarial fit has improved across generations. Our baseline 3% discount rate scenario estimates that the current schedule deviates from its fair form by less than 1% for average-mortality beneficiaries, compared to 5.1% and 4.0% for male and female beneficiaries in 1980, respectively. The improvement is largely due to the increases in the Delayed Retirement Credit. For men, gains in life expectancy combined with the increase in the FRA also contributed to the improved fit. We predict that the designated increase in the FRA to age 67 will have little effect on the actuarial fit. We investi- gate schedules reflecting (further) increases in the retirement ages, as recommended by the President’s 2010 Fiscal Commission, and propose alternatives. We also discuss results from the analysis of the adjustments to spousal and widow(er) benefits.

Suggested Citation

  • Frank W. Heiland & Na Yin, 2014. "Have We Finally Achieved Actuarial Fairness of Social Security Retirement Benefits and Will It Last?," Working Papers wp307, University of Michigan, Michigan Retirement Research Center.
  • Handle: RePEc:mrr:papers:wp307
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    References listed on IDEAS

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    Cited by:

    1. Bairoliya, Neha, 2019. "Pension plan heterogeneity and retirement behavior," European Economic Review, Elsevier, vol. 116(C), pages 28-59.

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