The Social Security Retirement Age

At a time when Social Security is increasingly getting lawmakers' attention for the possibility of reform, raising the retirement age is starting to emerge as one of the more palatable options. Coincidentally, the Urban Institute held an event on it recently at the exact same time the Senate held a hearing about older Americans' participation in the labor force. The two issues are very much intertwined and many other issues also combine to raise questions about how we balance retirement security, health security, labor force participation, and fiscal sustainability in an effective way.

The normal retirement age (NRA) currently sits at 66, having been bumped up from 65 gradually. It is scheduled to increase again starting in 2017, increasing two months each year until it reaches 67 in 2022. There has been talk of further increasing the retirement age to 68 or even 70, justified by the fact that life expectancy has increased significantly since Social Security was enacted 75 years ago.

The benefits of raising the retirement age obviously come through the most in the fiscal equation. While retirement age increases are generally thought of as benefit reductions on the individual level, they improve both sides on a macro level. By encouraging people to work longer, the worker-to-beneficiary ratio increases, having the effect of both increasing payroll tax revenues and reducing the benefits paid out. It is one of the few options talked about that works on both sides of the fiscal equation.

Additionally, there are some economic benefits. Encouraging longer labor force participation obviously increases the labor supply over the long-run. It can also increase the wealth of older workers and consequently increase their savings. In the long-run, both of these effects--bigger labor force and higher savings--will lead to higher economic growth. Also, working longer will mean that retirees will have fewer years to rely on their own wealth, a particular concern for those at the lower end of the income distribution.

However, much concern about increasing the NRA comes from a distributional perspective. A common argument against retirement age increases is that it is a regressive policy since longevity increases have accrued to top earners more than to low earners. One measure used by EPI's Monique Morrissey at the Urban Institute event shows that since 1982, male life expectancy at age 65 has increased by five years for the top half of earners, while it has only increased by one year for the bottom half.

Other concerns stem from the ability of workers to be able to keep working into their mid- to late-sixties. The Urban Institute event focused heavily on the vulnerability of older workers to "health shocks" and how the Social Security disability insurance program (SSDI) might not be well equipped to handle a larger number of these cases. Many workers who are unable to work at their jobs in their later years don't qualify for SSDI because they are not strictly disabled, but rather have physically strenuous jobs. Many of the event participants also argued that those who do qualify for SSDI do not get benefits that adequately replace the income and wealth lost due to disability. Those who oppose increasing the retirement age say that these problems are made worse if people have to work into their late sixties to receive full Social Security benefits. Also, these issues are distributional in nature, since low earners are more likely to have strenuous jobs, more likely to have "health shocks", and less likely to have the wealth to weather a disability.

These concerns certainly are not unfounded and could be addressed in the context of a Social Security reform plan that raises the NRA. The Brookings Institution's Gary Burtless, who supports raising the retirement age, suggested liberalizing eligibility for SSDI to allow people with physically strenuous jobs to qualify. An expansion of SSDI is one way to deal with the health concerns of an increased NRA. An option to address the distributional concerns would be to modify benefits for low-income earners to offset the effects of a higher retirement age. This could be done, for example, by instituting a minimum Social Security benefit (one of the illustrative options in our budget simulator) or by modifying the PIA formula favorably for low earners (either by increasing the first PIA factor modestly or increasing the first bend point). These "sweeteners" could help bring together lawmakers to enact a plan that balances the concerns of income security and fiscal sustainability.