Steuerle on Why Retirement Age Increases are Not Regressive

When considering raising the retirement ages for Social Security or the eligibility age for Medicare, some critics usually argue that change would disproportionately harm poorer workers, who do not live as long as wealthier workers. Michael Fletcher alludes to this in his recent article in The Washington Post about disparities in life expectancy among different socioeconomic groups.

While research has suggested a relationship between life expectancy and income inequality, it is not true that raising the retirement age would represent a transfer from poorer Americans to wealthier Americans. We've taken on this idea before, showing that raising the retirement age would amount to a slightly progressive reduction in benefits.

^{Source: Social Security Office of Retirement Policy}

As far as the difference in received benefits due to the link between income inequality and life expectancy, that is a regressive feature of the Social Security program, not the change itself. Urban Institute fellow and CRFB board member Gene Steuerle explains on his blog The Government We Deserve:

Suppose I designed a government redistribution policy that increases lifetime Social Security benefits by $200,000 for every couple with above-average income that lives to age 62. For every couple with below-average income that reaches age 62, my program would increase benefits by $100,000.

Does this sound like a good policy? Well, that’s exactly what Social Security has done by providing all of us with increasing years of retirement support. People retiring today get many, many more years of Social Security benefits than those retiring when the system was first created. And, the primary beneficiaries are the richer, not the poorer, among us. Throwing money off the roofs of tall buildings would be a more progressive policy, since the poor would likely end up with a more equal share.

Why, then, do some Social Security advocates oppose increasing the retirement age?  Because the $100,000 in my example could mean proportionately more money for the poor. For instance, it might add one-tenth to their lifetime earnings (of, say, $25,000 a year for 40 years of work, or $1 million over a lifetime), while the $200,000 to rich individuals might add only one-fifteenth to their lifetime earnings. As it turns out, even this assumption isn’t correct, but let’s assume for the moment it is.

Why would we want to redistribute that way? Following that logic, we should have protected the jobs of all the Wall Street bankers after the recent crash because their wages represented a smaller share of their income than the wages of poorer workers providing support services. Or perhaps we should provide $5,000 of food stamps to those making more than $50,000 and $3,000 of food stamps to those making $20,000; after all, the latter would still get proportionately more.

As it turns out, however, more years of retirement benefits don’t benefit the poor proportionately more than the rich. Yes, the poor have lower life expectancies, but other elements of Social Security offset this factor. A greater share of the poor doesn’t make it to age 62, so a smaller share of them benefit from expansions in years of retirement support. More importantly, those who are poorer are more likely to receive disability payments that aren’t affected one way or the other by the retirement age; hence, again, a significantly smaller share of them benefit from more retirement years. Other regressive elements such as spousal and survivor benefits also come into play for reasons I won’t further explain here. Empirically, these various factors add up in such a way that increases in years of benefits help those who are richer and those who are poorer in ways roughly proportionate to their lifetime incomes.

It's not that this income disparity is unimportant, and the differences in life expectancies is something policymakers should consider in Social Security reform. But it doesn't mean that an increase in the retirement age would be a regressive policy change. As Steuerle explains:

In sum, the recent widening gap in life expectancy, likely due to such factors as differential rates of cigarette smoking, deserves serious attention. But let’s not pretend that throwing money off the roof, or providing more years of retirement support to the non-disabled who make it to age 62, addresses the core issue. There are better ways to compensate than converting a system originally designed to protect the old into one offering middle-age retirement to everyone.

The full post from Steuerle can be found here.