Impact of working after retirement on public pension systems

[Guest PSRSGirl]

I'd like to know what sort of impact has been made within your retirement system and otherwise by allowing retirees to return to work and receive their benefits.

[Demosthenes]

This is an extremely complicated issue, touching as it does on Social Security, the US deficit, capital markets, monetary policy, and international monetary exchange rates. A complete answer would require a book to thoroughly investigate. That said, here is my take on the subject.

First, some background and basis for my conclusion, skip this if it’s redundant to you. Social Security is not now, and never has been, a funded benefit plan. It is a pay as you go system with some stretch through what is loosely called the Social Security surplus. Next, the Social Security surplus is an illusion. Any dollars collected by Social Security over and above current obligations (current payments to retirees) are invested in US Treasury instruments, which are in effect, the debts of the US government. This reduces US Govt debt on the open market but does not reduce total obligations; it just swaps one form of obligation, future payments to Social Security with another, indebtedness.

Debts of the government are backed by the “full faith and credence” of the US Government which boils down to the ability to collect current and future taxes. Therefore, a negative Social Security balance (more $ out than in) equates to higher taxes, less spending, or more US Treasury instruments that need to be sold on the open market. More open market selling impacts the Federal Reserve Board’s monetary policy and (depending on who you listen to) may or may not impact the cost of funds to corporations (interest rates) and the attractiveness of Treasury instruments overseas (impacting foreign exchange rates and hot money flow).

That said, I’ll stick my neck out and hazard the opinion that retired workers who rejoin the workforce while collecting Social Security benefits, can be said to have a net positive effect on Social Security. In effect the Social Security taxes withdrawn from the paycheck are returned as part of the Social Security benefit check. In addition, Social Security which used to be an entitlement program has now changed to one that is partially means tested, above a certain level, additional taxable income begins to reduce Social Security benefits. The combination of additional tax payments into the system along with a possible benefit reduction reduces the current burden on the system but may or may not have a net positive impact on the economy as a whole.

I haven’t even skimmed the surface of this issue, it’s far, far, too large to cover in a message board. For a definitive answer, I’d read Freidman, Krugman, Greenspan, or others of the host of economists who have touched on this subject.

[david rigby]

Pretty good Demo.

However, I suspect that your answer has nothing to do with the original question, which probably was inquiring about state and local government plans.

[Guest PSRSGirl]

Thanks for your response Demosthenes.

You brought up some good points. Social Security is definitely an issue that can no longer take the back burner.

In this post, however, I am interested in how state and local government plans have been impacted by retirees who return to work (under the same system) and continue to receive their benefit.

I know if the retiree takes a job from a new worker, it prevents both the employer and employee contributions from being made AND prevents new blood from entering the profession. What other positive or negative impacts does it have on the system?