A Letter in Support of Raising the Retirement Age

Nine months since the creation of the Fiscal Commission, we are now just one month away from the scheduled release of its report/recommendations. For the past nine months the Commission has been pelted with letters and requests to keep off of Social Security. So when the American Academy of Actuaries sent a letter to the Commission arguing for raising the retirement age, it was something worth noting.

The letter addresses many points that have been raised by opponents of making changes to Social Security. The Academy basically lumps such arguments into two categories: one challenging the view that raising the retirement age is a de facto benefit cut, and one addressing many "specific concerns" over an increased retirement age (such as people in physically demanding jobs and unequal distributional effects of gains in life expectancy).

First, they combat the "benefit cut" view specifically. They point out that for all the years that the retirement age remained fixed (and even after adjustments included in 1983 legislation), retirees have been getting a de facto benefit increase, since they will spend more years collecting benefits in the system than previous generations. This increase comes on top of the fact that initial benefits grow with wage inflation and retirees have (for the most part) recevied annual COLAs.

In addition, the Academy says that raising the retirement age creates a "signaling effect" that people should work longer and delay retirement. They explain it below:

For example, if the retirement age is raised by one year, and a worker retires a year later, the worker’s annual benefit is approximately the same as if he or she retired a year earlier and the retirement age had not been raised. The combination of the change in retirement age and the change in behavior leaves the retiree with approximately the same degree of retirement security as without those changes. That is the intended effect, which is very different from a direct cut in the benefit formula.

Basically, raising the retirement age--and specifically indexing it to life expectancy--reduces the "benefit increase" associated with longer life expectancy, rather than actually cutting benefits. And even with an increase in the retirement age, benefits would still be growing as they always do.

After addressing the benefit cut view, the Academy discusses the myriad concerns involving the view that raising the retirement age would allow more Americans to slip through the cracks. These concerns include the unequal distribution of gains in life expectancy (the rich have generally seen larger gains in life expectancy than the poor) and the hardship an increased retirement age could create for people who simply cannot work, like those in physically demanding jobs.

The Academy states that the concerns are legitimate, but that is no reason to leave the retirement age unchanged for the whole population. These targeted concerns could be addressed in other ways, for example, by reforming disability programs or making the PIA formula more progressive.

Remember that an increase in the retirement age should come in the context of an overall reform plan. It is not a stand-alone policy. While we often present Social Security reform as a choice of different levers, the choices made should be part of a coherent plan. So, categorically rejecting a raise in the retirement age without the context of a reform plan is not constructive.

We appreciate the Academy's constructive addition to the Social Security debate.