Raising the Retirement Age and Other Needed Reforms

Posted by Jeffrey Brown on Nov 8, 2010

Filed Under (Retirement Policy, U.S. Fiscal Policy)

Last week I posted a short piece about the retirement age debate in France. Later in the week, I was interviewed by the public radio show “MarketPlace” about this topic. It is a short piece, that I recommend even if you skip over my few-second quote. You can find it by clicking here.

In preparing for that interview, I ran across a useful summary of the fiscal implications of raising the retirement age put out by the Social Security actuaries.

I continue to believe that raising the retirement age ought to be part of any Social Security reform package. But even if we continued to raise the NRA to age 70, given the desire to phase it in slowly (most discussions talk about a month every two years), it will be the start of the 22nd century before we would actually reach age 70. As such, the savings are a bit slow to build. Roughly speaking, taking it all the way to 70 on this time path would eliminate about 1/3 of the 75-year actuarial deficit as well as shave the annual deficits in the long-run by about 1/3. That is a non-trivial cost saving. But it does also mean that even if we do this, we need to find ways to fill the other 2/3 of the financing gap. In short, we will need additional reforms on top of raising the NRA.

Some of my favorite reform pieces include:
- increasing the number of years of earnings that we average into the benefit calculation. This not only reduces average benefits, but it does so in a manner that provides additional incentives for labor supply
- slowing the growth rate of initial benefits for high income earners (technically, this can be done by indexing the upper parts of the benefit formula by an amount that is less than wage growth)
- basing the annual cost-of-living adjustment (COLA) on a superlative price index, or perhaps the current index minus a bit to reflect its overstatement of inflation
- capping the spousal benefit at 50% of the median household’s benefit (technically, the PIA) so as to avoid paying high spousal benefits to someone just because their husband or wife was a high earner

Together, these changes would go a long way toward restoring fiscal balance to the program. It would be nice if our political leaders would hurry up and do some of this, so that we can then turn our attention to the much harder question of how to fix Medicare.

15 Responses to “Raising the Retirement Age and Other Needed Reforms”

  • Ryan says:

    I agree that several changes need to be made simultaneously in order to get social security funds back in order. However, I think its outrageous to expect that raising the retirement age to 70 won’t happen until 2100. The average life expectancy by then could exceed 100 years old and we would have the same problem we currently face. There needs to be a faster way to get the normal retirement age to be 70.

  • Charles says:

    I realize that Social Security is the “third rail” of politics, but one of the more sensible solutions to future funding problems is to combine the following:

    1 – Immediately increase both the EEA and NRA. Even increasing these numbers from 62 and 67 to 63 and 68, respectively, would represent significant cost savings for the SSA.

    2 – Continuously increase the EEA and NRA. Simply increasing these numbers once won’t fix the problem. Preferably this continuous increase would match the increases in the average life expectancy on a yearly basis.

    3 – Remove the cap on the payroll tax that supports SS and set a new cap on the maximum yearly income that can be used to calculate the AMIE. This increases the tax revenue that funds SS and caps the maximum payout high income individuals can earn. SS benefits are, on average, already a relatively small percentage of retirement income for individuals that earn more than the current $106,800 SS tax cap.

    While this list is not all-encompassing. Changing these three things would increase the revenues of the SSA while reducing their costs. This should hopefully allow more than 28%* of 18-34 year-olds to feel like they will obtain SS benefits.

    *Based on a 1994 survey.

  • Kay says:

    To solve the problem of funding shortage, there are two way-cutting expense and increase income. The article above tells about the tactics of slowing the increase of expense. However, from the other aspect, Social Security should consider more sources to fund the retirement pension besides taxes.
    I realized a phenomenon that nowadays workers are taking much more responsibilities to fund their benefits than ten to twenty years before. When the cost of health care and medical care increase, employers transfer this increase to employees in the form of cutting salary or wages.
    Besides Social Security, Employment Retire Pension Benefit is a main income resources for retirees. I think this is the time that employers take back the responsibilities to fund pension plans to release the burden of Social Security.

  • Tina H says:

    As much as the thought of working until age 70 is quite daunting, I can not argue at major moves need to be made. I honestly feel like “something’s gotta give,” and the overall people should be willing to adjust their benefits to cater to the overall good of the nation. Especially since our retirement age in the US has risen to an average of 78.4 years, we should be able to fathom a higher retirement age. Moreover, the life expectancy can continue to rise with advanced medical technologies. I feel like anyone who is a condition to afford less benefits, like the rich, should also be able to “give.” And slowing the growth rate of initial benefits for high income earners seems like a great idea.

  • Justin Smith says:

    I agree with the above poster that “something’s gotta give.” I feel like it a less complicated issue than Medicare and that we have all the possible solutions. It is time for one to simply be chosen. In terms of a solution that is best, I definitely think that utilizing multiple solutions to smaller extent may be most beneficial to cost savings and for keeping current benefits. If NRA was increased to 69 and maybe one year of additional earnings averaged into the benefit calculation, we may be able to save the same amount. Furthermore, I feel like increasing the NRA could anger the public the most of any solution, just because of the thought of working until such an old age. I feel like losing $25 per month from a social security check, while devastating, does not have the emotional impact that increasing NRA would on the public. Obviously, this was seen in France.

  • Feng says:

    I’m thinking that maybe NRA is not the key part as compared to the role of SS. As people are sure to live longer, we might continue to disagree with the idea of raising NRA. For one thing, nobody loves work when we are forced to. For the other, everybody wants to game the system: I refuse to work more, and you have to pay. I argue that the foremost problem is to keep SS a really basic level of benefit that everybody has a strong motivation to work longer, or harder, during their working age. When pension and life-insurance play a more important role, SS is no longer the trouble.

  • Amanda N says:

    I do agree that the retirement age should be raised. No one can deny that the average life expectancy has drastically increased since the NRA was set in place. I also agree that this is definitely not going to fix the whole problem. I notice a lot of people complaining about any possible provisions. In my opinion, it is time to face the facts and start making sacrifices so that we get on the right track. If people keep opposing every possible solution, we will dig the hole deeper for us. There is no solution out there at this point that is a win-win for everyone and if there was, does one really think there would even be so many discussions about the issue? One other provision I agree with is “capping the spousal benefit at 50% of the median household’s benefit (technically, the PIA) so as to avoid paying high spousal benefits to someone just because their husband or wife was a high earner”. I believe people should put in some effort to receive benefits and that higher income people may just be sliding by and getting benefits they do not necessarily need. It will be interesting to see what Congree will actually do about this issue.

  • Meghan says:

    It is obvious that our nation’s current “do-nothing” approach is leading to devastating effects on our fiscal present and future. Reform needs to happen now. It’s the age-old adage: “procrastination is the thief of time,” and time is definitely something we don’t have. I certainly believe that phasing in reforms, though beneficial in allowing an adjustment period, will still take too long to come into effect. That said, I find it ridiculous to expect people to work when they are 70. Yes, we are living longer, but is anyone considering the quality of life at age 70? Yes we have medical advances to prolong life, but many come at the expense of serious handicaps. Granted, there are 70 year-olds fully in possession of their faculties, so if they want to work, and are capable, go ahead. But forcing the entire population seems more to discourage efficient labor, than promote it.

  • HP says:

    I really like the idea of increasing the number of years of earnings that are averaged into the benefit calculation. Most of the solutions to reduce underfunding have a negative impact on the end user- reduced benefits, delay in collecting benefits, etc. Increasing the number of years averaged motivates participants to work longer at their higher waged jobs because there is a direct benefit in doing so. I haven’t seen another reform suggestion that allows workers to benefit, or at least not lose, if they so choose. If the NRA is raised to 70, increasing the number of years averaged especially seems to make sense since the average worker will be working longer.

  • Jimmy G says:

    While there is no doubt that the Fiscal Commission’s proposal to change Social Security is necessary, some of the alterations seem to significantly impact he benefits of the middle class. Increasing the retirement age has benefits due to actuarial life expectancy increasing, and this change could help eliminate 21% of the funding gap. However, it is important to note that the life expectancy of high income individuals is increasing at a much more rapid rate than the life expectancy of low income individuals. Increasing the retirement age cuts the benefits of lower income individuals who are not expected to live as long, yet they still retire at the same age as high earners. It seems that other possible solutions to closing the funding gap, such as making all earnings of those who make over $107,000 per year subject to Social Security tax. Taxing those who can afford it seems to be a better solution than increasing the retirement age and cutting the benefits of lower income people.

  • FL says:

    I strongly agree that merely increasing Social Security’s retirement ages will not ease the financial pressures that the system carries, but this step should be part of a major package of changes. One thing we need to include in the package is to increase the rate of return that the program provides younger workers, otherwise, the younger workers would face a series of tax increases that will both reduce their standard of living during their careers and make it ever harder for them to save enough to supplement their Social Security income. I also stand in the same position of expecting quick action taken by the political leaders. Social Security will begin to run continuous cash flow deficits as soon as 2017, and Congress does not have the luxury of delaying hard decisions—or of implementing them. Instead, it must have the courage to let some of today’s workers know that they will likely have to work longer before they can receive Social Security benefits. This may not sound like a pleasant message, but it is a fair one. In my opinion, further delay will only force Congress to make an even more unpalatable decision as Social Security’s finances continue to worsen.

  • Matt W. says:

    Raising the retirement age seems liike a logical step. Life expectancy continues to rise and even if other changes help make Social Security stronger, increasing life expectancy (and thus more time collecting benefits) will ultimately become a problem again.
    I am surprised the idea of increasing the number of years of earnings that are averaged into the benefit calculation is not often heard in Social Security reform conversations. It seems like a more logical means of encouraging workers to work longer.. I think to the normal individual the incentive to working an additional year is more obvious at the surface than simply increasingg retirement age and may change some habbits.

  • Hillary Haen says:

    I agree that raising NRA is a big step to changing social security but I find it interesting that the subject is battled against so ferociously by those already retired. The people who would be affected by the change in NRA seemingly don’t care. In some ways I’m grateful that older individuals are taking it upon themselves so that I can have a younger retirement age. At some point in the whole social security debate though, it makes sense that some side is going to have to give in and lose some benefits. This makes no one happy, but NRA is the logical choice, especially because as a country our average age is increasing .1 years every year. Not to mention that because social security is a pay as-you-go system, raising the retirement age is a great way to defer payments of a large group of individuals!

  • Nick Vainisi says:

    The retirement age absolutely needs to be raised in order being addressing fixing our Social Security problems. The mere existence of resistance to raising the NRA shows the party politics played when it comes to Social Security and Medicare which keeps reform stagnated. I think your final point is a very important one. The longer we let our most obvious, massive problems linger. The longer other issues stay ignored. We need to finally come to a compromise and solution to fix Social Security so we can reform Medicare so we can figure out the deficit so we can move on to immigration and so on.

  • Da Hyun Kim says:

    I agree on Amanda’s comment on the fact that it is now time to make some sacrifices because if we keep opposing to find the “best” solution that satisfies “everyone,” we will never be able to solve. In fact, if we do not make a decision and wait any longer, we might not even have a single solution later on. I personally am not so in favor or increasing the retirement age because as Feng and Justin said, the idea of “forced to work” until an increased age will likely reduce workers’ motivation to work harder. Especially since the benefit of increasing the age does not seem to outweigh the cost (worker’s lack of motivation, anger, etc.). As Jeff mentioned, we will still have 2/3 of the deficit we need to cover afterwards. Yet, at the same time, I do agree raising the NRA is a big step to be taken. Among the many options, I like the idea of capping the spousal benefit at 50% the most because I feel like this will have a lesser impact than the other options and affect the least number of people.
    I don’t think there is a single solution to this problem – and at this point, I do not think a single solution CAN solve the entire issue. So as many suggested, we should use a combination of possible solutions to reduce the deficit, and more importantly, put some action NOW.