How retirement hurts living standards for boomers

The baby boom generation -- aged 52 to 70 -- is going into its “Golden Years,” and some boomers would like to keep working or even take a second job to supplement Social Security.

But a study from the National Bureau of Economic Research (NBER) categorically refutes this scenario. The “tax disincentives” of working nine-to-five -- or earning an extra $20,000 at the local McDonalds -- make employment a lost cause. What they’ll see instead is most of that paycheck vanish into the black hole of the IRS, not to mention state and local taxes.

“You’re better off staying home and eating macaroni and cheese,” said one of the study’s four authors, Boston University economics professor Laurence Kotlikoff.

It’s hard to argue with some of the study’s premises. Boomers who take Social Security early at age 62, rather than the full retirement age of 66 – or 67 for those born in 1960 or later -- face a huge tax disincentive. For every $2 earned, one is likely to be taken away by a 50 percent marginal (or extra) tax rate on earnings above the recipient’s monthly Social Security check.

And that’s only one of the many ways the tax code can work against boomers who want to earn additional money. They’ll also encounter higher Medicare taxes and other disincentives, said Kotlikoff. “Older people can also lose disability benefits if they make too much money.”

When the NBER study added up all the different federal programs that apply to boomers, the result was a negative number. “Many, if not most baby boomers appear at risk of suffering a major decline in their living standard in retirement,” said the NBER.

“With federal and state government finances far too encumbered to significantly raise Social Security, Medicare and Medicaid benefits, boomers must look to their own devices to rescue their retirements, namely working harder and longer,” the study claimed.

Despite advice to the contrary, about 98 percent of seniors take Social Security prior to age 70 -- when they have to and would receive the most money.

“Almost everyone does the wrong thing,” Kotlikoff said. “They take the Social Security money as soon as possible.”

Not only do they get less, but they face “a plethora of explicit federal and state taxes and implicit taxes arising from the loss of federal and state benefits as one earns more” said the study. That includes Social Security’s complex earnings test and the clawback of disability benefits.

But this doesn’t mean older Americans are stupid. “Most older workers aren’t privileged and need to retire early, either because they’re fired or laid off, or the work is killing them,” said Teresa Ghilarducci, an economics professor at the New School in New York City and an adviser to Democratic presidential nominee Hillary Clinton.

Once “retired,” more than half of retirees find that their savings are inadequate for the 20- to 30-year road ahead and feel as if they’re behind right from the start, according to a study by the Employee Benefit Research Institute. They take Social Security because they need it. Then they look for a part-time job to supplement their income. That’s when they get caught in a squeeze. They find that if they’ve already taken the minimal payout from SS, they won’t earn much from a job.

“Working longer, say an extra five years, can raise older workers’ sustainable living standards,” the NBER study states. “But the impact is far smaller than suggested in the literature, in large part because of high net taxation.”

So in many ways, retirement for boomers is a drag. Pensions, which used to support people after they retired, are vanishing, and 401(k) plans and IRAs work only if people invested in them, and wisely. Most didn’t, according to Federal Reserve data, and those who did may have become victims of recession, the need to draw on their plans to survive or simply made the wrong choice of investments.

Ghilarducci said the answer is increasing Social Security benefits, reforming the pension system and making 401(k) plans “universal and efficient.”

Good luck with that, or with a reform of the tax code, said a New Jersey financial planner whose name was not used for compliance reasons. “The tax code is like a pinball machine,” he said. “One thing bounces into another. And it would be nice if they raised Social Security, but it’s going broke.”

But most disheartening is the way many people see their lives ending -- sooner rather than later. “They’re sure they’re going to die young, which is why they take Social Security early,” Kotlikoff said. “Then they don’t have to pay any bills. Death is financial salvation.”

  • Ed Leefeldt

    Ed Leefeldt is an award-winning investigative and business journalist who has worked for Reuters, Bloomberg and Dow Jones, and contributed to the Wall Street Journal and the New York Times. He is also the author of The Woman Who Rode the Wind, a novel about early flight.