Arnold Kling  

Retirement Age in Play?

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Bruce Bartlett says it is. He refers to Congressional testimony by Eugene Steuerle, who said,


Increase the early and normal retirement ages. We should do this even if there were no long-term imbalance and even if all the saving were devoted back to Social Security. Increasing the retirement age would allow us to devote greater resources to the truly old, since it has no effect on benefits at later ages. Relative to other benefit cuts, it would provide higher annual benefits, since a delay of even one year in retiring can often increase annual income by 8 to 10 percent for many individuals. At any given tax rate, it provides for a higher lifetime benefit since it results in increased revenues from working longer. It also provides relief for Medicare through higher Medicare taxes, and for the rest of the budget through higher income tax revenues.

For all these reasons, an increase in the retirement ages (including the early retirement age, else it is just an across-the-board benefit cut) causes the least hardship of almost any benefit cut.


Read Steuerle's entire statement.


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CATEGORIES: Social Security



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COMMENTS (25 to date)
Boonton writes:

I tend to agree. Let the retirement age slowly increase and eventually index itself to expected lifespan. I wonder, though, would advocates also increase the age at which people can tap their 401K's/IRA's without penalty?

KipEsquire writes:

"For all these reasons, an increase in the retirement ages ... causes the least hardship of almost any benefit cut."

But of course, that's 100% incorrect for the people who die between the previous retirement age and the revised retirement age, for they lose 100% of their benefit.

Boonton writes:

How about people who purchase homeowners insurance & do not get anything at the end of the year because they suffered no fire? Likewise how about the person who saves enough in his 401K to finance a 15 year retirement but realizes in year 13 that he will live another 10 years but is too old to go back to work?

Having a lump sum retirement (as with a private account under Bush's plan or a 401K/IRA) carries with it its own risks.

Randy writes:

The problem with raising the retirement age is that it will likely condemn a great many elderly people to working in menial low paying jobs while waiting for Social Security to kick in. Raising the retirement age does give elderly employees an incentive to work longer, but it does not give employers an incentive to keep them around. The fact that people are living longer hasn't changed the working life cycle one bit. We're living longer after getting old. But we're still getting old in our 60s.

With this in mind, it seems that if people are going to have a longer old age, they are going to have to pay more into the system during their working years. And the problem becomes, how do we keep the government from spending the extra money?

Boonton writes:

I don't think Randy's idea is backed by emperical data. I suspect people are not only living longer but 'getting old' later (if you define getting old as totally leaving the workforce). Employers have as much incentive to hire older people entering the workforce as they do to hire anyone else. If someone can produce profitable output there is an incentive to hire them.

spencer writes:

I would argue for adjusting the retirement age, but keeping the early retirement option. I'm not looking at in terms of system costs, rather as a reflection of different peoples experience. If you are a knowledge or white collar employee you probably can continue doing your job until a later age. But if you are a manual worker your ability to continue working does decline sharply.
Such people should have the ability to take the early retirement option.

Randy writes:

Boonton,

Re; "I don't think Randy's idea is backed by emperical data."

I swear, I knew you would say that :)

But you are correct that I am basing this on personal observation. There is evidence that some people are staying healthier longer, but certainly not all. I am also certain that I have read stories of age discrimination in hiring. I agree with Spencer that there will be much variation. Perhaps we should be looking for optional plans. Retire later, pay less - Retire earlier, pay more. I hate to use the words private accounts because of the expected emotional response, but these would allow considerable room for personal preference along these lines.

Randy writes:

Let's assume that the retirement age is raised. I predict that this will result in the upper-middle income earners saving more and therefore continuing to retire in their early 60s. But the lower and lower-middle income earners, those most dependant on Social Security for their ability to retire, will now be forced to wait until their late 60s or even 70s. Do we really want to create such a disparity between classes?

John Ford writes:

I'm no historian but my understanding is that when Roosevelt et al. first conceived of soc sec, it was designed as a safety net to prevent abject poverty in the elderly. The retirement ages initially were based on the then current life expectancies which have certainly increased markedly since the late 1930's.

Soc security was never intended as an income supplement and definitely not as an avenue for early retirement.

I believe it is historically sound to increase the retirement age to reflect current life expectancies and eliminate the notion of early retirement.

This is would be in keeping with the original intent of soc sec and would be the most equitable way of solving the increasing ratio of payers to recipients that is plaguing the system now.

John

John Ford writes:

Sorry, that last sentence should read:

This is would be in keeping with the original intent of soc sec and would be the most equitable way of solving the decreasing ratio of payers to recipients that is plaguing the system now.

monkyboy writes:

John,

The recent gains in life expectancy come mostly from a reduction in infant mortality. Even in 1935, over half of all workers were expected to reach retirement, and I believe once they did they were expected to live almost 12 years...

John Ford writes:

Monkeyboy,

You're correct but the number of years of life at all ages as demonstrated by life table analysis has also increased significantly since the 1930's.

The fact is that people ARE living longer even apart from the markedly reduced infant mortality rates.

John

John Ford writes:

Also, older Americans are much healthier in general and are better equiped to continue working well past their 50's and frequently into their 70's.

As I understand it, the system was originally created to prevent a situation whereby the elderly infirm could avoid poverty despite not being able to work.

John

Brandon Berg writes:

But the lower and lower-middle income earners, those most dependant on Social Security for their ability to retire, will now be forced to wait until their late 60s or even 70s. Do we really want to create such a disparity between classes?

Well...yeah. What's the point of working hard to make more money if you can't use it to buy a better life? It's one thing to argue that the government should prevent people from starving to death, but why should taxpayers be forced to support people who are capable of supporting themselves? Retirement is a privilege, not a right.

Boonton writes:
But you are correct that I am basing this on personal observation. There is evidence that some people are staying healthier longer, but certainly not all. I am also certain that I have read stories of age discrimination in hiring. I agree with Spencer that there will be much variation. Perhaps we should be looking for optional plans. Retire later, pay less - Retire earlier, pay more. I hate to use the words private accounts because of the expected emotional response, but these would allow considerable room for personal preference along these lines.

Ancedotal evidence can be deceptive. Stories of age discrimination may not mean that seniors are getting shut out of the labor market. It might mean that more and more seniors are staying in the labor market longer or returning to it and you are hearing about the cases that cause a stir in the media. We heard a lot of stories about gender discrimination in the 70's and 80's but those decades were marked by a large increase in working woman as compared to the 50's and 60's when few people made a peep about the issue, right?

The trade off Randy describes has always existed. If you want a long cushy retirement you have to save a lot (or save a little but make a lot...1% of a million a year is a lot nicer than 10% of $50K per year) or you can opt to work longer and have a shorter retirement.

The tools to make this decision are already available. SS has made it easier for everyone to retire earlier (don't get so excited by complaints by seniors about having to live on a fixed income...everyone complains that they could use more money the facts are seniors are better off today as a whole than they have ever been...even those who live on nothing but SS).

Over the last 20 years it has never been easier for someone to choose earlier retirement. Here's how:

1. 401K/IRA's...naturally a no-brainer for the person who is planning to retire as early as possible.

2. Houses...mortgage interest being tax deductible makes putting money into home equity quite easy.

3. Capital gains...you only pay capital gains taxes when you realize them. In other words, if you buy GE today for $40 and tomorror it is $50 you pay no tax on that $10 profit until you actually 'cash out'. You can save as much as you want in your high income years and cash out strategically in your low income years.

3.a. An added bonus, 'long term capital gains' are taxed at a lower rate than income. So a person who makes $25,000 cashing in long term capital gains pays less tax than a person who makes $25,000 working a low end job. Of course you also can strategically sell stocks to offset gains with losses to reduce taxes even more.

Of course it still isn't easy for the person who hasn't had a huge winfall or is willing to accept a long retirement on very stretched out dollars to retire early. It never has been, though, and logically it should be hard. If I'm on my own from age 20 to 85 that gives me 65 years to cover myself. If I plan to work 60 years then I only have to plan for 5 years and my 'work years' will only be taxed to support 'non-work years' at a ratio of 5-60 or 1 to 12 (one non-work year to 12 work years). If I plan to only work 30 years (retiring at 50) I will have a ratio of 35-30 or 1 to 0.857. In other words, every working year has to cover itself plus a bit more than one non-working year.

Randy writes:

Brandon,

Re; "Retirement is a privilege, not a right."

I agree. But as the net effect of raising the retirement age will be to deny many in the lower classes the ability to retire at all, something they have come to expect, I think its worth considering just how we're going to tell them.

"Sorry, the system isn't working as well as we expected, so all you peons need to just keep on working. Yes, I'm going to retire on my 401k, and if you were as smart and/or dilligent as I am, you could too."

I'm sure they'll understand. But again, I really do think you are right about retirement being a privelage. The problem is that a promise was made that retirement was going to be a right. And now that promise is going to be broken. You're not wrong - but there is still a problem.

Boonton writes:

No one was ever promised a set period of retirement. The retirement age could be raised to keep in line with increasing lifespans & no generation will see a cut in expected retirement years.

Lawrance G. Lux writes:

The Steuerle idea has great merit, but will not sell with the American people, who dream of Middle-Age retirement to travel etc.

A Counterproposal would be to Cubicle retirement plans, so as to phase in Benefits with specific age. Hard to describe, but easy to implement. Simply state Benefits will be paid for every 40 Quarters of Work at set rate--but not to pay until 30 or 35 years after the Work was completed. This plan would pay the smallest and cheapest Benefit for the first 10 years, but increase smoothly to match the increasing Expenses of Age. lgl

Randy writes:

True, there was never a promise in writing. And yet people have come to believe that they will be able to retire - even lower class working people. I'm not saying its a bad idea, just that someone is going to have to tell them that they don't get to retire.

Think of it this way, if I'm going to die before I retire anyway, why do I want to give the government all that money while I'm working? So the averages say that people are living longer. Not the people who need it the most. They're still getting old in their early 60s and dying in their early 70s.

Look around you at the people you know who are in their 60s. They are old. They have health problems. Not to mention that many of them are just plain tired of working. If you don't see it, it might be that you are looking in the wrong neighborhood.

Perhaps on average, 60 is now "middle-aged". But if this is middle-aged, then middle-aged doesn't doesn't mean what it used to mean.

Mcwop writes:
How about people who purchase homeowners insurance & do not get anything at the end of the year because they suffered no fire? Likewise how about the person who saves enough in his 401K to finance a 15 year retirement but realizes in year 13 that he will live another 10 years but is too old to go back to work?

HO insurance does not cost most people 12.4% of payroll.

People forget an average life expectancy is just that - an average. 50% of the people die before that age.

Boonton writes:

True, there was never a promise in writing. And yet people have come to believe that they will be able to retire - even lower class working people. I'm not saying its a bad idea, just that someone is going to have to tell them that they don't get to retire.

Who doesn't get to retire exactly? Even lower class working people are smart enough to know if you die before you retire you're not going to get a retirement!

Look around you at the people you know who are in their 60s. They are old. They have health problems. Not to mention that many of them are just plain tired of working. If you don't see it, it might be that you are looking in the wrong neighborhood.

Yes but the fact is people in their 60's have always been older than people in their 50's, 40's and 30's etc. Historically, however, they have never been so good. For cases where people are physically unable to work disability can kick in at any age. As for being just plain tired of working, well aren't we all to one degree or another?

Boonton writes:
People forget an average life expectancy is just that - an average. 50% of the people die before that age.

Indeed but you shouldn't forget that 50% will live longer than the average as well.

Randy writes:

Boonton,

You're not disagreeing with my points, you're just saying they don't matter. What I'm saying is that to some people they do matter.

For some people, raising the retirement age increases the probability of dying without receiving a dime. It also increases the probability that some people who are not living longer or aging more slowly will have to continue to work for years after they are in fact old.

I'm not disagreeing that, on average, we're living longer. It is obvious that something has to be done. It just seems to me that a better approach is to set aside more money during the working years to pay for the non-working years, as opposed to extending the working years.

The upper middle class can save on their own, or choose to work longer, because they are the ones living longer and healthier. If necessary, benefit cuts should fall on those who are both the source of the problem and the most capable of adapting to the cuts - the upper middle class. But leave the retirement age as it is to provide some possibility of a decent retirement for the lower classes.

Boonton writes:

What one can do to keep this argument somewhat objective is first to note that for any given person we can establish an expected value of their Social Security benefit. This can be done by simply taking their life expectancy (which insurance companies compute in very fine detail) and each check they are due to receive and discount that to a single present value.

Since the retirement age will almost certainly be raised slower than the increase in lifespans the present value of SS benefits for even low wage workers will almost certainly be higher than previous generations with or without the age increase. The only difference is that the expected benefit will not increase as fast.

If you're really concerned about low wage workers why not advocate making the benefits formula a bit more progressive and pay for it with the savings from increasing the retirement age?

Randy writes:

Boonton,

Re; "If you're really concerned about low wage workers why not advocate making the benefits formula a bit more progressive and pay for it with the savings from increasing the retirement age?"

Making the system more progressive is exactly what I am proposing. But doing so does not require a change to the retirement age. Decrease the benefits paid to the upper middle class to compensate for the fact that they are living longer, and use the funds to keep the system the same for those who are not.

While it might be possible to apply an actuarial table on an individual basis, I'm not sure it would be politically feasible. But we do have to recognize that raising the retirement age across the board is a very regressive measure - it punishes most those who are least responsible for the problem.

Lifespan is the cause of the problem, but it isn't, in and of itself, "the problem". The problem is lack of money. And the solution can be applied just as easily, and more fairly, to the money as to the retirement age.

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