Study: Just a Few More Years of Work

July 25, 2006 ( - Those with significant 401(k) balances will only have to work about two years longer than the average retirement age to ensure financial security, but retirees who depend solely on Social Security for retirement safety will have to work three and a half years beyond the retirement age, a recent study suggests.

The purpose of the study published by the Center for Retirement Research at Boston College was to determine how much longer people will have to work in the face of rising Medicare premiums, probable increases in Social Security taxes and a shifting benefit paradigm from defined benefit plans to defined contribution plans.

The authors predict that the money reaped from Social Security will replace less pre-retirement earnings as the Normal Retirement Age increases from 65 to 67.

According to the study, a “medium earner” who retired at age 63 receives Social Security benefits equal to about 36% of pre-retirement earnings. However, because the age that workers can collect retirement Social Security is increasing, the replacement rate is expected to drop by 4.9% for those retiring at 63 and by 5.6% for those retiring at 65.

Based on the study’s results, the Center expects Medicare Part B premiums, which help pay for doctors’ bills and outpatient services, to increase as a percent of the Social Security benefit, which would also chip away at replacement rates. The study found that the rise in premiums would decrease the replacement rate by 1.5%.

A third effect on replacement rates is that by the year 2030, medium earners are expected to pay income tax on about half of their benefits, while today only a handful of individuals pay taxes on their benefits.

However, the authors suggest that individuals can offset declining replacement rates if they work a few years longer. The study shows that a worker in 2030 will have to work until age 67 to receive the same replacement rate as a worker retiring today at age 65. Similarly, those who would have chosen reduced benefits atage 63 in 2002 will have to delay claiming benefits until 65 in 2030 to get to same replacement rate.