Let's face it. Social Security is not in good shape. If reforms are not passed, Social Security disability is projected to be depleted in 2016, and the Social Security Trust Fund itself will exhaust its funds in 2033 (SSA 2013 Trustees Report). As much as I do not like the program, I still think that if the program is going to be in existence for some time, something needs to be done to improve it. I was reading an article from the Manhattan Institute entitled Four Reasonable Social Security Reforms, and the first reform that popped up on the list was raising the retirement age, which is the more formal way of saying "let's find a way to cut Social Security benefits." People can currently collect partial retirement benefits at the age of 62. For those born after 1958, the full retirement age (FRA) is 67. I have to ask myself: would raising the retirement age to something like 70 years actually help Social Security solvency woes?
The rationale behind this policy alternative, whether it is in the form of raising the early retirement age (ERA) or the FRA, is that since the Social Security retirement age increase in 1983, the average lifespan has increased from 74.6 years to 78.4 years. Without an increase in retirement age, the program is paying for longer benefit periods, which is something that the government cannot afford. The increase in retirement age would compensate for longevity by adjusting for that previous benefit period elongation, not to mention that the life expectancy is only expected to rise over time. Raising the retirement age would come with benefits. One is that it would incentivize workers to work longer and save more money before retiring (Butrica et al, 2006; Rust and Phelan, 1997; Gorry and Slavov, 2012), which I like. In "Working Longer: The Solution to the Retirement Income Challenge" (p. 57-58), it is pointed out that setting the retirement age plays a vital role in diminishing the willingness of workers to work longer. According to a McKinsey Report (2008), this policy would add $13T to the economy over 30 years due to the economic productivity of those who would stay in the workforce longer. Work is also less physically demanding than it used to be because we went from a manufacturing-based to service-based economy. The decrease in physically demanding labor makes it easier for workers to work longer (Johnson, 2007). A National Institutes of Health (NIH) report, which gathered data from 15 government agencies, shows that the health and overall quality of life for older citizens has improved over the years, which would dispel notions that older workers are pushed too hard.
One of the complaints of raising the retirement age is that it will hit poor and minority workers the hardest because they do not experience the life expectancy gains in the same way that rich and/or white workers do (Weller, 2005, Rosnick and Baker, 2012). However, the lifespan differential between races closes considerably once the life expectancy is measured at 65 (Census) [as opposed to being measured at birth], as can the differential between socioeconomic classes (CBO, 2008, p. 2). It can also be argued that older people have a harder time finding a new job due to ageism, and even if they did find work, they would not get paid as much. I would conjecture that the demographics are much different than they were in the past. In the 1970s, Baby Boomers had to be integrated into the workforce, which displaced some older workers. With the pending retirement of Baby Boomers, there will be droves of experienced workers looking to retire while there are not as many younger workers with comparable skills to replace them. This structural demand issue should mitigate worries about more elderly workers not getting paid at market value. And if the worry is still not abated, Congress can pass a Social Security payroll tax exemption for workers in their sixties so that employers would be incentivized to hire or retain more elderly workers. Furthermore, it's nice that the work is less physically demanding, but does little good if the worker has prior health problems that impede further work, which could very well qualify the worker for disability. Not only could those costs be transferred over to the Social Security Disability program, which is in even worse shape than the retirement program, but it would provide workers approaching retirement an incentive to apply for disability (CBO, 2013). On the other hand, although 18 percent of workers retire by age 65 due to health issues (Munnell, 2006, p. 8), it should be safe to assume that health care quality will improve over time, thereby decreasing the number of those who require such assistance.
There could be reforms to the disability program to close the loophole or to protect disadvantaged workers in their early sixties, but still, how much money would be saved by raising the retirement age? Raising the full retirement age to 70 would only decline by 0.4 percentage points of the GDP in 2040 (CBO, 2010, p. 31), which is less than ten percent of the overall Social Security spending. In 2012, however, the CBO estimated that it would reduce overall outlays by 13 percent. Raising the full retirement age to 70 would reduce overall returns by fifteen percent, which could be devastating for those who are more dependent on Social Security. Aside from raising the FRA, there are other ways to create incentives for workers to retire later (Templin, 2013, p. 1250-1252).
Even so, this comes with a couple of concerns of mine. The first is that raising the retirement age will not be sufficient to deal with the looming federal debt crisis. It's rare that a single policy can effectively change the course of governance, and it's not expected to do so. If raising the retirement age can help mitigate some of the fiscal concerns, I am all for it. This leads into my second concern, which is even more gargantuan than the first. Whether it is in the form of increasing payroll taxes or cutting benefits, both of these policy alternatives deal with Social Security quantitatively. Nothing is done to ameliorate the quality of the program itself or even overall retirement prospectives for Americans. Since Social Security is a) financed by taxing wages, and b) the benefits are linked to wages, the benefits will increase at about the same rate as wages. This would certainly explain why Social Security provides such a lousy rate of return. Alternative retirement options are linked to savings and investment in capital markets, which is why they produce a higher rate of return. Although I think raising the retirement age is a good idea, it does nothing to address the quality of retirement in America. Until we approach Social Security by addressing root problems, the state of Social Security will be as stagnant as ever.