Raising the Retirement Age and Other Needed Reforms

Filed Under (Retirement Policy, U.S. Fiscal Policy) by Jeffrey Brown on Nov 8, 2010

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.