Help Yourself and America: Delay Retirement

BOSTON – What's good for the goose is good for the gander. Yes, Americans who delay retirement for just one year will not only help themselves but they also help their country — big time.

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To wit: Americans, or at least those who are able, would increase their annual income by an average 5 percent from age 50 onward just by delaying retirement by one year according to a new Center for Retirement at Boston College research report. What's more, they would increase their annual income by a whooping 25 percent just by working an extra five years, say the study's authors, all of whom are Urban Institute researchers.

But that's not all. Americans who delay retirement by one to five years will help reduce the need for Uncle Sam to make as drastic changes in the form of benefit cuts or tax increases to Social Security before its scheduled insolvency in 2045.

To be sure, this paper's top-line findings may seem a bit obvious.

As the study's authors note, when people work longer they earn more income and usually save some of that money. Plus, when people work longer, existing assets earmarked for retirement will likely continue to grow. And, workers who delay retirement increase their lifetime Social Security benefits and increase their annual Social Security benefit even more when their lifetime benefits are withdrawn over a shorter period of time.

But the degree to which delaying retirement can help certain Americans, the economy and Social Security is perhaps not so obvious.

In fact, Barbara Butrica, one of the study's authors, estimates that people could increase their "annual consumption" by more than 25 percent simply by retiring at age 67 instead of 62. (Sixty-three, by the way, is the average age at which Americans retired in 2005, according to Eugene Steuerle, another of the study's authors.)

According to the study, Americans who delay their retirement by one year would generate an extra $1,317 to $2,402 per year, depending on whether someone had to dip into their 401(k) or not.

In effect, the authors say the additional net wealth that comes from one more year of work, if annuitized at retirement, could increase consumption by 9 percent per year. And those who delay retirement by five years would see their annual retirement income rise by $14,888 per year, or by 56 percent per year.

The benefits are even more pronounced for lower-income workers, say the study's authors. Workers in the bottom lifetime earnings quintile could increase retirement income by 15 percent with one more year of work and nearly double retirement income with five more years of work.

Not surprisingly, middle-income workers would enjoy greater increases than the richest workers, though not as much as low-income workers.

Meanwhile, the benefits of Americans delaying retirement to the Social Security system are fairly significant as well, though not enough to eliminate completely the need for reform. "Some additional reform, such as an increase in the normal retirement age, is still likely to be required," the study's authors say. "However, the added payroll tax form the additional work can reduce the size of any benefit cuts or tax cuts needed to increase solvency."

Of course, there are some big differences between reforms that reduce benefits and reforms that encourage Americans to keep on working, while partially reducing benefits. For instance, the authors say work-inducing reforms will need fewer benefit cuts to keep Social Security afloat.

Some reforms and trends that encourage Americans to work at older ages are already underway.

One, the Social Security normal retirement age is increasing. The normal retirement age for those born after 1960 is 67; it's 65 for those born in 1937 or prior.

Two, more and more companies are shifting their pension plans away from traditional defined benefit plans that guarantee a monthly income to defined contribution plans such as the 401(k)s that put the onus of creating money for retirement on the individual. And three, more and more Americans will have to figure ways to pay for health care in retirement.

But much more can be done to help Americans delay retirement for their and America's benefit. For instance, reforms that decrease early Social Security benefits or those increase the so-called delayed Social Security benefits or those that remove the requirement that forces Medicare to be the secondary payer on health insurance for those age 65 and older, could go a very long way toward making it easier to encourage Americans to keep on working.

Robert Powell is editor of Retirement Weekly — a service of MarketWatch, author "20 Tips for Retirement Investors," and co-author of "Decoding Wall Street." He is also developing two personal finance series for public television.

Click here to visit FOXBusiness.com's Retirement page.