Topic: Miller College of Business

April 24, 2007

There will be little or no harm to future Social Security recipients if they stop paying into the system years before they plan to retire, says a new study from Ball State.

An analysis of the formula used to compute Social Security benefits found that the typical wage earner's Social Security benefits increase only slightly as a result of working past age 45 to 52.

For the average worker, the first eight years of labor produce the same Social Security retirement income as the next 24 years of labor, says John Fitzgerald, a finance and insurance professor, and Terry Zivney, the Maxon Distinguished Professor of Finance and Insurance.

"The typical worker's monthly Social Security benefit is not dramatically reduced even if the worker drops out of the work force years before the normal age of full retirement, which is between 65 and 67," Fitzgerald said. "This is true from a wide range of incomes from part-time minimum wage workers all the way to those earning the maximum wage base, which is currently at $97,500 annually."

The study found that because of the way in which benefits are computed, 10 years of average wages from ages 20 to 30 are exactly as valuable as 10 years of average wages from ages 50 to 60.

"So long as one's earnings, relative to those of the average worker, are consistent, it doesn't matter when one earns the creditable years," Zivney said. "Also, a worker who earns twice as much as the average person needs only to work half as long to get exactly the same monthly benefit."

Unlike a defined benefits plan, increasing participation in Social Security beyond 35 years does not result in greater benefits. And, unlike a defined contribution plan, additional years of contributions do not result in potentially greater benefits.

Fitzgerald said because there is no financial incentive to work more than 35 years under the existing Social Security system, extending full retirement age beyond age 67 is unlikely to create an incentive to work longer.

"Even though a person may consider total after-tax income when deciding whether to continue to work, there are ample opportunities to work and not pay Social Security taxes," he said. "For example, an empty nester could choose to work overseas for a few years without negatively impacting his or her Social Security benefits."

By Marc Ransford, Senior Communications Strategist