Raising Social Security Retirement Age Is No Simple Fix

Defenders say Social Security is being unfairly targeted in intensifying debate.

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Raising the Social Security retirement age is one of the common prescriptions forwarded to close the program's long-term funding gap. Increasing or entirely lifting the ceiling on taxable wages—now at $106,800—is another frequently mentioned proposal. Further down on the list are measures to change the annual cost of living adjustment for Social Security recipients, restrict payments to high-income beneficiaries, and a slew of benefit tweaks that could have a meaningful cumulative impact on program finances.

Such talk panics many seniors. Many still are reeling from enormous hits to their retirement investments. Millions of older homeowners have watched housing prices plummet. Under these conditions, considering any changes to Social Security is simply inconceivable. Here's one reality that's often not emphasized: None of the proposed changes would take effect for years, and perhaps decades. We're talking long-term adjustments here, not crisis-driven cuts in next year's benefits.

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Unlike the government's other big safety-net programs—Medicare and Medicaid—Social Security is not facing imminent funding problems. With no changes at all, the program projects that it will pay all benefits until the year 2037 and would then be able to continue paying out nearly 80 percent of benefits. Any changes to the program are thus needed to close a funding gap that won't occur for 27 years. Another misconception about Social Security is that it is floating in red ink. Actually, the program has a surplus exceeding $2.5 trillion, and this cushion would grow for a number of years until eventually being sapped by the benefit payments to millions of retired baby boomers.

At first glance, raising the retirement age seems like a straightforward change that simply recognizes the demographic realities of aging. People are living longer than ever and are physically able to continue working into their 60s and even 70s. The economy will need more older workers, because retiring boomers are being followed by a much smaller generation of workers. Lastly, people will need to keep working more years for financial reasons—to recover from the recession and to fund retirements that will last a long time.

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Social Security is one of the ways they will boost retirement earnings, of course. Most people earn more money later in their working lives than when they were younger. So adding several years to a person's Social Security earnings history is likely to boost their Social Security benefits when they do retire.

House Minority Leader John Boehner (R-Ohio) has suggested raising the retirement age to 70. Many other experts have made similar arguments. Andrew Biggs at the American Enterprise Institute makes an informed case for raising the earliest age at which people can begin receiving Social Security benefits.

So, what's not to like? According to a phalanx of liberal seniors' groups—foundations, think tanks, women's groups, and other Social Security "preservationists"—the longevity rationale for raising the retirement age is not a story that applies to lower-income and less-educated men and, especially, women. They would get hammered by raising the retirement age. And they are precisely the group of Americans—and a pretty big group at that—that depends desperately on Social Security benefits for the bulk of their retirement incomes.

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Here's the preservationist logic against raising the retirement age:

1. Social Security benefits are pegged so that a person reaching what the agency calls its "full retirement age" (FRA) is entitled to his or her full benefit. Someone retiring at the earliest age, which is now 62, gets about 75 percent as much money each month from Social Security as if they waited until their FRA—66 for people now approaching retirement. It's also possible to defer taking Social Security until the age of 70, when the monthly benefit would be about 132 percent of what it is at the age of 66. This benefit structure was deigned to be dollar-neutral to Social Security. Looking at longevity data and past decisions of beneficiaries, the agency figured that it will pay out the same amount of money regardless of when people elect to begin receiving benefits.

Raising the retirement age from 66 to 70 means that the time gap between early retirement at 62 and full retirement has been increased from four to eight years. This assumes that it would still be possible to take early retirement at the age of 62. If the agency keeps its benefit structure in place, it no longer can afford to pay a person 75 percent of their FRA benefit if they elect to begin receiving the benefit at the age of 62. Instead, that "value neutral" payment at the age of 62 will fall to about 57 percent of the full benefit. In dollar terms, a 62-year-old early retiree due $1,000 a month at his or her FRA would receive $800 a month if the FRA was 65, $700 a month if it was 67, and $565 a month if it was 70. These calculations were made by Nancy J. Altman, co-director of Social Security Works.

2). In theory, longevity gains mean that if the FRA was raised to 70, early retirement might begin at 66 and not 62. Raising the retirement age would thus shift everyone by four years. The system would save money by having to pay benefits for four fewer years. But individuals would not be so bad off, because they'd have worked for an extra four years and presumably boosted their retirement incomes during that period of extra work. But while such longer lives are truly wonderful, they unfortunately are not being enjoyed by lower-income, less-educated people who work in physically taxing jobs. They're not living longer.

Longevity gains are most pronounced for wealthier people—precisely the ones who don't depend heavily in Social Security payments. The non-partisan Congressional Budget Office said in a 2008 report that "In 1980, the difference in life expectancy at age 65 between the highest and lowest socioeconomic groups was 0.3 years. By 2000, the difference had grown to 1.6 years. That increase in the gap equals more than 80 percent of the increase in overall average life expectancy at age 65 over that period."

The reasons for the gap are not nailed down, the CBO said. Lower-income people may not take good care of themselves, either because they can't afford to or because they don't know how to. Wealthier and better-educated people, on balance, follow healthier lifestyles, seek out medical care, and follow their doctors' advice in taking medications and related therapies for health problems.

3. Lower-income people also are not likely to be able to extend their working lives another four years. That's because many work in physically demanding jobs, and their bodies have just worn out by the time they enter their 60s. People who retire at the age of 62 today tend to work in low-income, physically demanding jobs. For them, early retirement is not a luxury but a forced necessity.

"While fewer factory jobs exist today than in the past, many service jobs are backbreaking, including nursing and nursing home care, janitorial jobs, outdoor service jobs, waitressing, or any job where workers have to stand on their feet all day," says a white paper from the National Committee to Preserve Social Security and Medicare. "Millions of American workers have these jobs, and asking them to work an additional 3 or more years is often simply not possible for them physically."

4. Raising the retirement age will thus sharply cut benefits of people who are still forced to seek early retirement. And these folks also often have little set aside in the way of a retirement nest egg. Social Security benefits thus represent a very large percentage of their retirement incomes. Cutting those benefits, preservationists argue, is thus punitive as well as heartless.