Social Security Administration  in mid-October 2009 released a bulletin entitled "The Disappearing Defined Benefit Pension and Its Potential Impact on the Retirement Incomes of Baby Boomers." The percentage of workers covered by a traditional annuity, often based on years of service and final salary, has been steadily declining over the past 25 years.

In the past few years Social Security's Old?Age and Survivors Insurance (OASI) program has undergone some of the most important changes since its inception. In a short period of time, we have seen three major changes to the system:

1. the implementation of the phased increase in the full retirement age (FRA), with the resulting increase in the penalty for claiming benefits early;
2. the elimination of the earnings test for those above the FRA; and
3. the incremental increase in the delayed retirement credit (DRC) for those claiming benefits after the FRA.

The changes in the FRA and the most recent changes in the DRC are the result of the reforms following the recommendations of the National Commission on Social Security Reform. The removal of the earnings test is a more recent development, which was unexpected for the average American.

There is relatively little research analyzing the consequences of all these changes, mainly because of how recent they are. Public pensions are a major income source for older Americans, and under the OASI program during 2008, SSA paid about $509.3 billion to almost 42 million beneficiaries.

Given the importance of Social Security, it is not surprising that the discussion over the need of reforms to the system has gone on for a long time. In fact, the 1983 Amendments to the Social Security Act were meant to solve short?term financial imbalances and the more serious long?run financial crisis that Social Security was headed toward. The reforms resulting from those amendments have started to take effect during the past few years, as the discussion on possible additional reforms continues.

Social Security provides fairly complex incentives that undoubtedly affect the labor supply and benefit claiming behavior of individuals starting at the early retirement age and continuing until age 70. Retirement benefits at all ages are intimately linked to a person's earnings history, but also to a fairly large number of provisions that compute the benefits a person receives.

The 1983 Amendments to the Social Security Act included, among other measures, the change in the FRA starting with the age group attaining age 62 in 2000 (those born in 1938), for whom the FRA was set at 65 and 2 months. The FRA has increased by 2 months for every age group since then until it reached 66 for those who attained age 62 in 2005, and it will stay at that level for a decade.

The FRA will increase again by 2 months for the age group born in 1955 (who reach age 62 in 2017, and it will continue to increase by 2?month increments for successive birth age groups until it reaches 67 for the 1960 age groups.

The changes in the FRA and the DRC were clearly easy to anticipate by those nearing retirement age, and it is natural to expect comparatively less pronounced changes in behavior resulting from their phased implementation.

More unexpected was the repeal of the earnings test for individuals above the FRA, which withholds benefits for individuals earning above the exempt amounts.

You can find the entire Social Security Bulletin: Vol. 69, No. 3, 2009  online.