By Theodore R. Marmor
and Jerry L. Mashaw
An old adage says that every problem has an obvious solution that is both simple and wrong. We fear this applies to the idea of increasing the formal retirement age for Social Security.
The widespread assumption is that the long-term financial health of the Social Security Administration requires raising the age of eligibility for full retirement benefits. This seems obvious for a few reasons.
First, although Social Security today has a huge surplus, projections suggest a shortfall in two decades unless something is done to shore up its finances. Requiring workers to wait longer to collect benefits would surely save money.
Second, Americans are living longer and staying healthier at older ages. So deferring retirement seems like a sensible and relatively painless way to help maintain America's most popular government program.
The difficulty is that the world is not as simple as this suggests, and the apparently painless reform could be quite painful indeed.
Social Security pensions are crucial to most low- and middle-income Americans' retirement income. Two-thirds of retirees get half or more of their retirement income from the program, and one-third are almost totally dependent on it. The average yearly benefit is only $14,000, so any reduction causes real pain in the lives of retirees whose working incomes were in the low to medium range.
Furthermore, benefit reductions are already taking place. The full retirement age is slowly increasing and will reach 67 in 2027. Each year of delay in pension payments results in a reduction in every worker's lifetime benefits of roughly 6.5 percent. Thus, when the current increases in the retirement age are fully phased in, workers will have experienced a 13 percent drop in benefits since 1983, when the retirement age began to creep up.
Meanwhile, premiums for Medicare's outpatient and drug coverage, which are deducted from Social Security payments, have risen much more rapidly than Social Security's cost-of-living adjustments.
Social Security's impact is already being diminished as a result of both developments. A medium earner's Social Security pension replaced roughly 39 percent of his prior earnings in 2005. By 2030, after the retirement age increase is phased in and given predicted Medicare premium increases, that figure is expected to drop to 32 percent.
In short, adequate retirement income for average Americans is already in jeopardy. And this is in an era marked by declining employer pensions and radically reduced real estate values.
Moreover, low and medium earners are least likely to have benefited from the health advances that make raising the full retirement age seem like such an obvious solution. Over the past 25 years, life expectancy for upper-income men has increased by a whopping five years. Men in the lower half of the income distribution, however, have seen their life expectancy increase by only one year. And for lower-income women, it has actually declined. Not all Americans are leading longer, healthier lives, and those who aren't depend on Social Security the most.
Low- and middle-income Americans are also more likely to have jobs that are physically demanding and to face poor working conditions. Indeed, nearly half of workers older than 58 work in such jobs, and more than a quarter of those over 60 report a health condition that limits their ability to work. Many Americans simply will not be able to work longer, and those taking benefits before the full retirement age face large decreases in benefits.
Any decent reform proposal that includes an increase in the retirement age should address the impact on low- and middle-income workers. In addition, we can expect more applications for Social Security disability benefits from older workers who simply cannot keep working until they reach an increased retirement age. The expense of these increased disability benefits, as well as of adjustments to maintain the adequacy of pensions for low- and middle-income workers, would sharply limit the savings to be gained from increasing the full retirement age.
In short, this obvious, simple solution to Social Security's relatively modest long-term financing problems turns out to be, if not wrong, not nearly as right as it appears. There is much pain and only modest gain from further raising Social Security's retirement age. Ordinary Americans, who overwhelmingly oppose the idea, seem to understand that better than our opinion leaders.