Social Security: Would This Tiny Change Make You Retire Later?

Gov. Chris Christie has made an interesting proposal in his Social Security plan. Image: State of New Jersey.

The Presidential campaign has heated up early this time around, and already, Social Security is promising to be a hot-button topic on the political agenda. Yet amid all the rhetoric surrounding whether Social Security benefits should be expanded, cut, or simply left alone, one proposal actually aims at solving what many see as a key policy problem with the program: that too many people take benefits as early as they can.

Encouraging later retirement New Jersey Governor Chris Christie released his plans for Social Security earlier this year, and his proposals included a number of controversial provisions. Most of the attention Christie's Social Security platform received focused on proposals to raise the retirement and to imposed a means-test on Social Security, with those recipients making $80,000 or more seeing their benefits phased out.

Yet one little-noticed provision of the Christie platform addressed a more subtle problem: how to get more people to go beyond the first possible date at which they can take benefits. Christie recommended a simple solution: cutting payroll taxes for those who work past the early filing age of 62.

The Presidential candidate isn't the first to suggest the payroll tax cut for older Americans. One longtime proponent for cutting payroll taxes for near-retirees is former Social Security Administration official Andrew Biggs, who has been working on the issue for years. In a commentary published in the Wall Street Journal in 2012, Biggs noted that the current Social Security system has several disincentives for those approaching full retirement age to keep working.

Why payroll taxes make you want to stop workingOn one hand, the way that Social Security benefits are calculated gives most near-retirees very little in extra benefits to compensate for the payroll taxes they pay if they keep working. For those who have extensive work histories of their own, the fact that Social Security looks at the top 35 years of earnings means that the additional wages you earn in the 36th year and after have a relatively small impact on your final benefits, thereby discouraging someone at age 62 from working beyond the 35-year mark. Biggs pointed to a 2009 study that he co-wrote for the SSA Office of Retirement and Disability Policy that found that every $1 of payroll taxes someone near retirement pays produces just $0.025 in additional benefits over that worker's lifetime.

In addition, spousal Social Security benefits are also geared against continuing to work. In many families, one spouse earns considerably more than the other, and if one member of a couple expects to take spousal benefits, then that person's own work history becomes completely irrelevant for benefit calculation purposes. Put another way, those who rely on spousal benefits get no return on their own payroll taxes, and so the only reason to defer benefits is to avoid the reduction in monthly payments that the SSA imposes for those who start Social Security before full retirement age.

Biggs responded to opponents who cited the lost payroll-tax revenue as a reason not to cut taxes by noting that offsetting increases in income-tax revenue could more than make up for the payroll-tax shortfall. Citing research, he believes that the move would be almost revenue-neutral and would result in a substantial boost to economic prospects for those approaching retirement age.

Would you work longer payroll-tax free?At first glance, it might seem silly to think that eliminating the payroll tax would make a major difference to near-retiree behavior. Employees pay 6.2% of their wages toward Social Security taxes, and so the take-home pay for someone making $50,000 a year would go up by about just over $250 per month. That's not trivial, but it's also not a huge amount.

For many, though, the financial disincentives in Social Security are just the final straw in a host of non-financial reasons people take into account in deciding when to retire. By contrast, the psychological benefit of being able to earn income without paying payroll taxes could make many near-retirees want to take advantage of the provision by working longer, thereby helping put themselves in a more stable financial situation.

Social Security's purpose is to help provide retirement security, but it was never intended to be the sole means of support for most retirees. By considering policy changes that encourage longer careers, proposals like eliminating the payroll tax for older Americans could provide a much-needed incentive to get people to work long enough to ensure their financial support throughout their retirement years.

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