PensionReforms' summary and comments
In the US, the State Pension Age (referred to as the "Normal Retirement Age" or NRA) is increasing gradually.  By 2027, it will be age 67.  The Earliest Eligibility Age (EEA) remains at age 62 and is not currently increasing with the NRA.  By 2027, there will therefore be a five year gap between the EEA and the NRA.

If a beneficiary chooses to take a benefit before the increasing NRA (now 65 years 10 months), the annual pension payable is actuarially reduced for each month of early payment. The purpose of the reduction is to approximate the value of the lower pension payable, on average, for a longer period with the higher "normal" pension payable, on average, for a shorter period from the NRA.  However, the effect of increasing the NRA means that a pension from a given early age is reducing in value - that means a larger actuarial reduction.  The value of the NRA pension itself is also reducing.

In theory, widening the early retirement 'window' from three to five years should increase the scheme's flexibility.  The alternative of raising the EEA could, as the report notes, "create excessive hardship for unhealthy or worn-out workers by forcing them to continue to work."  The report looked at "alternative policies for a non-uniform increase in the EEA that addresses this concern."

Some form of increase in the EEA was taken as a given. Here is the justification for that:
"However, a rise in the EEA would protect workers from facing an increased risk of inadequate benefits if they or their spouse live beyond average life expectancy."

PensionReforms thinks this is slightly curious.  Surely the point of the EEA is to give retirees more choices than a fixed NRA can allow.  The justification for lifting the EEA seems to involve 'protecting' retirees from making 'mistakes' that arise from their assumed myopia.  On that basis, perhaps the EEA should be abolished.

The report looked at two main possibilities for increasing the EEA in the context of the authors' goal "of protecting the low-AIME [average indexed monthly earnings] group from potential hardships associated with an increase in the EEA":
"This analysis first considers a simple rule of increasing the EEA to 64 while still allowing those with at least 35 years in the labor force to claim reduced benefits that are actuarially fair.  This rule is based on the assumption that lower-educated individuals usually have more physically-demanding jobs, and thus are more likely to be worn-out or unhealthy.  This rule also assumes that these workers would begin their work lives earlier and thus would have more years in the labor force at a given age."

Data from the Health and Retirement Study (HRS) suggests that this first 'simple' rule would be unsatisfactory because it would not achieve the authors' goal.

"In fact, we find a positive correlation between good health and years in the labor force.  As an explanatory variable in the decisions to claim benefits at 62 and to exit the labor force before age 63, we find that the more years a worker is in the labor force, the less likely he is to claim benefits and retire early.  Thus, it appears this simple rule for applying an increase in the EEA would not allow most unhealthy or worn-out individuals the option to claim benefits at 62."

It seems there is an unsurprising correlation between poor health and low average lifetime wages.  That matters in the calculation of the pension because the benefit depends on career, revalued wages and also on years of working/contributions.  That also tends to produce a "work-limiting condition at age 63" which would be a good reason a worker wanted to take an early pension.

The report suggests that ".a policy tying an individual's EEA to a measure similar to the Average Indexed Monthly Earnings (AIME) calculated by the Social Security Administration" might be preferable.

According to the report:
"This proposed policy has the potential of raising the EEA for most workers without placing a serious hardship on workers who are worn out or in poor health."

PensionReforms suggests that this kind of solution, however 'fair', illustrates the kind of problem faced by the sponsors of any Defined Benefit scheme - public or private - when conditions change.  Beneficiaries of the US Social Security system have 'entitlements', calculated in relation to earnings that drive contributions from both employees and employers.  A maximum of only 35 years (including 'deemed' years of caring for children etc.) count in the calculation and the non-counting years are set to increase as the NRA increases.  Perhaps that is another aspect of the scheme's design that requires review.

From a public policy perspective, if poor health really is the issue (at any age, not just near the EEA or the NRA) then the disability income support arrangements should be the focus of attention.

The US Social Security pension is already complex - the report's recommendation would make the choices about an individual's own EEA and retirement pension even more opaque.  PensionReforms hopes that the authors' promised further research leads to a simpler alternative, such as leaving the EEA at age 62 and letting retirees decide what they want to do.  If retirees prove to be consistently myopic (there is no evidence in the report on that) then the consequences should perhaps lie where they fall.  That would also unintentionally reduce the future cost of Social Security.  (File size 175 KB; 47 pp) 318