Raising the Social Security Retirement Age
If Social Security reform is political dynamite, the battle over whether to raise the retirement age may be the fuse. I got a hint of the passion behind this issue at an Urban Institute panel I moderated yesterday on Capitol Hill.
In recent weeks, both Steny Hoyer (D-MD), who is the number #2 House Democrat, and John Boehner (R-OH), the top House Republican, have put the idea on the table. Ah, you say, there is finally bipartisan support for something in Washington. Not so fast. Both are far out on a legislative limb with little public support from fellow lawmakers.
To review the bidding, for those retiring today the eligibility age for full benefits is 66 (slowly rising to 67 for future pensioners). Today’s retirees also may receive partial benefits at 62. Most economists who specialize in retirement issues would increase both eligibility ages. At yesterday’s panel, Rich Johnson, who directs Urban’s program on retirement policy, laid out four reasons: Americans are both living longer and spending more time in retirement, older Americans are better able to work than in the past, working longer can boost their retirement incomes, and raising the retirement age can help make Social Security solvent over the long run.
As Rich noted, over the past seven decades, life expectancy for 65-year-old men has increased by more than five years, and by more six years for women. And even as people live longer, they have been retiring earlier. Thus, today’s retirees are collecting for seven more years than in 1950. Women are receiving benefits for an average 20.5 years—more than one-quarter of their lives.
Seniors are not only living longer, they are healthier. From 1983 to 2007, the percentage of those 65-74 in either fair or poor health declined from one-third to barely one-fifth. Twice as many are college educated. And only about 40 percent of workers age 50-61 held physically-demanding jobs in 2006. Overall, the number of workers in these jobs has dropped from 57 percent to 46 percent.
Supporters of the status quo remind us that low-income people are likely to die at an earlier age and thus would disproportionately be hurt by changes in eligibility. Monique Morrissey of the Economic Policy Institute argued yesterday that in the last quarter century, life expectancy of low-income men increased by only one year. She also said that many people can’t work at 62—either because they are physically unable, are caring for sick family members, or because they cannot get a job even though they want to work.
A word about this last claim: While it is tough for older workers to find employment in today’s soft economy, we are talking about Social Security changes that won’t take effect for decades. By then, younger people will make up a much smaller share of the workforce, and there may be far more jobs available for seniors. In addition, older workers are likely to be healthier and better educated even as work continues to be less physically demanding.
Still, Monique is right that there will be many 60-somethings who can’t work. And we are obliged to help them out. But the solution should be to reform the Social Security disability program for those who need it, not to allow everyone else to retire early. Similarly, we need to find ways to help caregivers and others who can’t continue to work. But it is time for Social Security to recognize profound changes in both the nature of work and the abilities of many older workers.
My bet is we will raise the retirement age as one element of Social Security reform, along with requiring bigger contributions from high-earners and other reforms. As more older Americans are able and anxious to work, we ought to build a retirement system that encourages them to stay employed.
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Unfortunately, no matter what steps are taken to reform the social security system, there will be political fallout. There will be fallout if nothing is done and the system goes bust and there will be political fallout if any changes are made because one of the largest voting blocks is comprised of senior citizens who expect to continue to get what was promised to them. Even younger people will vote against change makers as they believe that by already paying into the system, a good faith contract was made to take care of them in their elder years.
As far as I'm concerned, raising the retirement age so that it only affects younger people is a non-starter. You already have a system where younger workers subsidize the elderly while receiving no current benefits, and you want to maintain that subsidy for the elderly while reducing the benefits for people currently paying into the system?
If you want to raise the retirement age, you need to give me something for my FICA taxes. Health insurance would be a good start.
Social Security only discourages work for people who retire early. Once retirees reach full retirement age, their benefits aren't withheld due to their work and earnings no matter how much they earn. Personally, I find it difficult to believe that most employable early retirees will forego employment income prior to FRA for their ~$14,500 in SS benefits.
Raising the Full Retirement Age is a relatively inflexible way of closing the actuarial gap. Considering how large the error bars are in these projections, I think flexible solutions should be implemented now and inflexible ones later.
My solution would be a phased in increase in the payroll tax indexed to a combination of wage growth and projections of the growth of the trust fund. (Indexing the tax increase would make sure not to take too big a bite out of average annual wage increases and would prevent an over-surplus in the TF.) This combined with the 90% solution for increasing the taxable cap should mostly close the gap.
The retirement age is only an important concept in a world without personal retirement accounts. Personal retirement accounts,however, are an essential feature if the system is seeking solvency for too long into the future – because if it does that it will require that money collected under the program would be otherwise used to fund general government. If the income cap is merely raised and the retirement age edged up slightly, this may be fine. If the income cap is eliminated, however, personal retirement accounts are a necessity.
Put another way, for personal retirement accounts to pass, fourthings must happen. The first is that the income cap must go away. This is important because the second thing is that redistribution must occur at account accumulation through the equal crediting of the employer contribution.
The third thing, which will make high employer contributions more acceptable, is to have these contributions made with employer voting stock – with some of these stocks traded for shares in an insurance fund of stocks from all participating firms. The fund could be public or private and there could be more than one. It would also be able to vote its shares if 26%+1 of employer voting shares demand a change in management (providing an incentive to management to behave but still take reasonable risk).
The fourth condition is that employees could opt to be represented on the board by a professional association or their Taft-Hartley organization (and such organizations would be allowed to invest all of their pension funds in the same scheme), with constituency rather than unitary board representation. Non-participating employers would purchase shares in the insurance fund only.
If personal retirement accounts under this scheme are enacted, people will retire when their dividend and stock resale scheme is large enough to meet their needs, perhaps supplemented by an annuity. Unlike current ESOPs, I would favor retirees continuing to opt to vote their shares or have their unions do so, with surviving spouses (of either gender) having shares converted to the insurance fund. After a certain percentage of shares are exhausted, there would be a required purchase of an annuity to guarantee an adequate retirement income.
I don't see personal retirement accounts passing without these conditions and I don't see the demand for such accounts from some sectors going away any time soon.