Early Retirees Pay Later, Broad Study Discovers

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Early Retirees Pay Later, Broad Study Discovers

By Kelly Greene, The Wall Street Journal
November 2, 2003

Retirees often debate whether it makes more sense to start taking reduced Social Security payments as early as age 62 or wait until Social Security's "full retirement" age to get a bigger monthly check.

Here's a reason to consider the latter: For low-wage workers, retiring early with lower benefits can raise the risk of poverty over time.

Researchers at the University of Wisconsin-Madison and Kent State University in Ohio studied the finances of 6,200 men and women receiving Social Security over a 10-year period. Their main finding, published in the journal Demography, was that people younger than 65 when they first drew Social Security started out with lower incomes and fewer assets than their 65-plus counterparts -- and in the first decade of retirement, the income gap grew.

The contrast was most stark for nonwhite women, the study found: 31% who retired at ages 62 to 64 were living in poverty a decade later, compared with 15% of those who waited to retire until at least age 65. The poverty rate rose for the early retirees over the 10-year span, and fell for older retirees.

"It's not that people who are well off stay well off and people who are poor stay poor, but that over time, the people who retire early become worse off, while those who retire later seem to be able to maintain their economic status," says Karen Holden, professor of consumer science and public affairs at Wisconsin.

The researchers haven't pinpointed the reasons for the gap, Dr. Holden says, and are studying "what changes in the financial picture" hurt early retirees. Some factors include their lower assets at the start of retirement and the death of a spouse, "but something else is going on, too," she adds.

There's one disadvantage right off the bat for early retirees: To get Social Security early, they take monthly payments 20% below what they would have received at full retirement age. And that reduction will get bigger in coming years: Under a 1983 law, the full retirement age is rising gradually to age 67 for those born after 1960 -- and the reduction for taking benefits early will widen to 30%.

Some people had understandable reasons to take benefits early, the researchers found. Those who started drawing Social Security before age 65 were more likely than older retirees to be in poor health and recently unemployed, and less likely to have income from assets.

"Many people take early retirement because they are worse off," says Dr. Holden. "What's surprising is that even though it's the best thing at that moment, they are a group that becomes more vulnerable to declines in economic status over time."

People planning retirement and policy makers alike "need to look at what happens to people over their postretirement lifetime, and really look at how they maintain their well-being," she says. The researchers suggest a possible fix for the group falling further into poverty: raising their Social Security benefits, either in "an income-conditioned way" or after they hit a certain age, to help them survive.