Trustees Report Strengthens Case for Retirement Age Increase

May 17, 2011 | Social Security

Last week, several bloggers, commentators, and columnists went after Al Simpson for talking about increases in life expectancy at birth (since this measure is affected by child mortality rates), arguing instead that the better measure is life expectancy at age 65 . From that standard, life expectancy has only increased by 5-6 years since Social Security began, which they argue undercuts the justification for an increase in the retirement age.

CRFB responded to these criticisms, arguing that in fact looking at life expectancy at 65 has its own set of flaws (since it doesn't account for the fact that Social Security is meant to insure working adults against the risk of old age) and that the right measure to look at is life expectancy at age 20 -- which has grown substantially. We also pointed out that raising the retirement age is one of the best options for improving retirement security and economic growth at the same time, and is actually progressive rather than regressive.

Social Security Trustee Chuck Blahous also responded to these criticisms, arguing that even life expectancy at age 65 has seen tremendous growth -- far more than the scheduled and proposed increases in the normal retirement age since 1940. He pointed out that when you account for the fact that the eligibility age has actually dropped from 65 to 62, under the Simpson-Bowles proposal "workers would be able to claim benefits earlier, collect them for longer, and receive substantially higher annual benefits regardless of the age of claim, than could workers in 1940"

And finally, Andrew Biggs, former Deputy Commissioner of the Social Security Administration, made the case that in evaluating reform proposals we need to make sure we account for future changes in life expectancy (especially since something like the Simpson-Bowles proposal doesn't raise the retirement age to 69 until the 2070s). By 2050, he explained "life expectancies as of 65 will be around 8.1 years longer than when the program started. That’s an increase of 59 percent in the benefits that would be paid over a full lifetime, compounded by a relatively lower number of workers available to pay those benefits."

With the new Trustees report out, it appears that Biggs' point is even more true than he had originally thought.

As we showed last week, Social Security's 75-year actuarial shortfall has increased from 1.92 percent of payroll last year to 2.22 percent this year. Fully half of that increase is a direct result of faster projected growth in life expectancy.

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Compared with last year’s report, life expectancy projections are now 7 months higher on average (for males) over age 65 over the next 75 years -- though the increases in projections are seen more in earlier years than later years. In total, life expectancy at 65 (for males) increased by 6 years between 1940 and 2011, while the normal retirement age has only increased by 1 year (2 by 2022). By the time the normal retirement age has increase by 4 years (to 69) under the Simpson-Bowles proposal, in the 2070s, life expectancy at age 65 will have increased by 9.5 years. In other words, even when using standard of life expectancy at age 65, the number of years people spend in retirement will continue to grow -- even setting aside the fact that we probably should be looking at life expectancy at age 20.

Given that life expectancy has grown faster than the retirement age and will continue to grow under every standard, indexing the retirement age to longevity should hardly be considered a radical reform. It's time to get serious about Social Security reform, and finding ways to honestly address to costs of an aging population should be at the center of that discussion.