Raise the early retirement age
In December, President Obama’s fiscal responsibility commission will recommend ways to fix long-term federal budget shortfalls, very likely including changes to Social Security. At that time, Congress should consider a reform that could increase retirement incomes while boosting the economy and federal tax revenues: gradually raising Social Security’s early retirement age of 62.
When Social Security was created in the 1930s, retirees could not start collecting benefits until age 65. But in 1956, eligibility rules were changed to allow women to begin collecting at age 62. In 1961, the rule was changed for men as well. Today, 62 is the most common age of retirement. With a typical 62-year-old likely to live to age 83, an individual now spends roughly one-third of his adult life in retirement.
For those who have saved enough, this is perfectly fine. But many people claim Social Security benefits at 62 without considering that doing so reduces monthly benefits by about 25% for life. Without early retirement, poverty among retirees over the age of 65 would be about one-fifth lower.
Restoring the early retirement age to 65 would have little effect on Social Security’s solvency, because benefits increase when retirement is delayed. The trust fund’s solvency would be extended for only a few years, meaning that other steps would be necessary to preserve it.
But raising the early retirement age would prevent lower benefits due to early retirement, raising average monthly checks significantly. Private pension benefits also would be higher — by about 15% — because retirees would have been paying in for longer and have fewer retirement years to finance. In a recent paper for the American Enterprise Institute, I analyzed the numbers and concluded that average annual incomes for future retirees would rise by about $7,500 if the retirement age was returned to 65.
Increasing the retirement age also would help the economy and the federal budget. The nation’s annual GDP would increase by hundreds of billions of dollars. Those extra dollars would be taxed, resulting in higher tax revenues to fund the federal budget. The additional revenue would reduce the federal budget deficit by several times more money annually than does the recent healthcare reform.
Some people, of course, aren’t physically able to work past 62. Others retire at that age because they can’t find a job. But in general, early retirees are neither less healthy nor less wealthy than later retirees. The Congressional Budget Office found that only about 15% of early retirees cite either losing a job or health problems as their reason for leaving the workforce. Likewise, more than 80% of individuals aged 55 through 64 report being in good to excellent health, according to the National Center for Health Statistics. A Government Accountability Office study concluded that “the majority of workers aged 62 to 67 do not appear to have health limitations that would prevent them from extending their careers.”
Perhaps the best evidence that future Americans can work longer is that past Americans did: Despite poorer health, shorter lives and more strenuous jobs, in 1950 the typical individual did not claim Social Security until age 68.5. In 1950, more than 20% of Americans worked in physically demanding jobs; today only about 8% do. While today’s technology-driven service economy places demands on older workers, it is hard to imagine that things were easier when Americans typically worked on farms or in factories.
One impediment frequently cited to Americans working longer is the shortage of jobs. Certainly unemployment is high at the moment, which is why any increase in the early retirement age should be phased in over time. But with 10,000 baby boomers leaving the workforce each day, businesses will need more employees as the economy recovers. And more affluent retirees are likely to spend more, which will in turn create jobs.
Several steps would make longer work lives easier while protecting those who can’t work. To begin, the Social Security payroll tax should be reduced or eliminated for individuals over age 62, giving older Americans the incentive to work and employers the incentive to hire them. To protect individuals who cannot work longer, Social Security disability benefits should remain available and the eligibility age for Supplemental Security Income — a means-tested benefit for the poor — should be lowered from 65 to 62. Finally, Medicare should be made the primary payer of health costs for individuals over age 65, which would significantly lower employers’ health insurance costs for older workers.
No one wants to work longer, just as no one wants to pay more taxes or receive fewer government benefits. But if future Americans simply work as long as past generations did, they could boost their retirement incomes, help the federal budget and benefit future generations.
Andrew G. Biggs is a resident scholar at the American Enterprise Institute in Washington.
