David R. Henderson  

Raise the Age

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Whenever I've talked to college audiences over the last 10 years, I've told them that the biggest domestic political issue for the whole rest of their adult lives is likely to be spending on Medicare, Medicaid, and Social Security. I would like to abolish all three of those, but another option is to abolish them all in slow motion. And, failing that, to raise the age limit for Medicare.

Many people agree that the age limit should be raised, given that life expectancies are higher than when Medicare was implemented in the mid-1960s and given that people in their late 60s are, on average, healthier than their counterparts of 40 years ago. But many of these same people despair that it could ever be done. Yet we have a case where just something like that was done: the Social Security reforms of 1983.

At the time, I was an economist with Reagan's Council of Economic Advisers and I despaired when the Social Security Commission, headed by Alan Greenspan, came out with its report. The Commission advocated no increase in the age but, instead, advocated speeding up tax increases that had been legislated for the future in a 1977 law and expanding the reach of Social Security to non-profits and newly hired federal employees. But when the compromise package reached Capitol Hill, one Democratic Congressman, Jake Pickle from Texas, bravely added an amendment and got it through. That amendment raised the Social Security age, in steps and in prospect, from 65 to 67. No one could argue that he wouldn't have time to plan because the increase was gradual enough to let people plan.

The same thing could be done with Medicare: raise the age to 67 in steps by, say, 2018 (three months per year for every year between now and then), and then index both the Social Security age and the Medicare age to life expectancy. This is a good bit faster than for Jake Pickle's reform, but the problem is also more serious. I don't like making these proposals because, as I wrote above, I think the whole system should be abolished. But it is a significant step toward solving a financial tsunami before it hits. Where's today's Jake Pickle?


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COMMENTS (9 to date)
Greg Ransom writes:

In California the public pension problem is bigger than SS or medicare .. government workers retiring at bloated 6 figure salaries at age 50 and younger are sucking the life blood out of the state.

Imagine if tax drained private economy employees are made to work to age 75 or 80 and forced retire on a pittance .. while government workers retire at age 50 as government bankrolled multi milloniares.

That's the world we are making.

Douglass Holmes writes:

We should be thankful for Jake Pickle, but the increase in Social Security age wasn't enough. It really needs to be 70, and the age for early retirement, currently 62, should also be raised.
Of course, David is correct. We need to raise the Medicare age and we need to do it yesterday.

Don Lloyd writes:

No one should pay any attention to a college professor who advocates an increased retirement age unless he can demonstrate even a single professor who voluntarily retires at 62 in good health and starts to draw SS. Overall, about 70%
of SS recipients start at age 62. Without proof, I claim that the difference between the general population and professors in this matter would not be greater if professors were all alien guest workers from Mars.

I cannot, off the top of my head, think of any other occupation which is even close to college professor in terms of how little they are negatively impacted by a increase in the retirement age.

Regards, Don

Jake Russ writes:

I agree that the age must be raised in order to combat rising expenditures (I stared at Arnold's table from earlier today).

But I do have a concern over this policy action if it were to actually be proposed in a bill: special interest exemptions. Just like the union exemption from paying taxes on medical benefits, when it was proposed in Congress. If we're going to raise the age on some, but not all, then I change my mind.

David R. Henderson writes:

@Don Lloyd,
I don't know if you realize this, but you just made an ad hominem. You judged my policy position not on its merits, but on my own situation in life. That's a very dangerous way to judge things. If I knew you, I could probably come up facts in your life that many people (not I) would use to judge positions you advocate. That's not how I do things and so I won't do that, even if I get to know you. But I do want to point out that you played dirty.

Don Lloyd writes:

David,

Thank you, but I didn't judge your policy position on your situation, but on the facts, as I see them, that raising the retirement age is a bad and illogical policy. Your situation is a possible source of bias, a possible partial explanation for why otherwise very logical and intelligent people seem to be making such a fundamental mistake.

Ignoring the silly and meaningless SS trust fund, the problem with SS is that it is a defined benefit pension plan, (although likely the mildest one known), with mandated future benefit levels and unknown future resources to pay them. The level of the mandated benefits is arbitrary. It might be too large, or it might be too small, depending on who does the evaluation.

With 70% of SS recipients starting several years early at age 62, raising the legal SS retirement age will not actually raise the retirement age for most people, but will likely reduce the future benefit levels in a deceptive manner. This what a politician would do.

If Fidelity offered an investment that explicitly admitted in advance that 25% of investors would not realize as much as a penny of return, even return OF investment, who would take up the offer?

In the case of SS, it seems likely that if benefits were begun at age 67, something of the rough order of 25% of the potential recipients would get nothing.

Also, for the vast majority of Americans, the new job market for someone in their 60's is, and will always be, atrocious.

If you are 67, increasing your probable age of death from 90 to 95 only affects the resources to be used after you reach age 90. SS cannot be prefunded even if the SSTF were filled with gold. You COULD store away some foods, but your consumption in part will be of goods not yet invented. All financial assets can do is enable you to bid away part of the future supply of goods from others.

Regards, Don


Chris Koresko writes:

@Don Lloyd,

"If Fidelity offered an investment that explicitly admitted in advance that 25% of investors would not realize as much as a penny of return, even return OF investment, who would take up the offer?"

Huh? I thought most or all of Fidelity's retirement savings plans worked that way. Or more precisely, that returns are in no way guaranteed, since they depend on the unpredictable performance of the investments the fund manager chooses. That's no mere hypothetical point, either: a lot of people have seen a fair fraction of their retirment savings evaporate lately.

I'm also curious why you believe that people would retire at the same age regardless of when their SS or other benefits started. It seems to me that a later start date would be a clear incentive to stay on the job longer. But then again, I come from an academic background and may suffer from the same bias you attribute to David.

Don Lloyd writes:

@Chris,

As far as Fidelity goes, it's a matter of degree. It is highly unlikely that your investment with Fidelity would result in a total loss of investment with no earnings, unless you wanted a high risk/high reward investment. With SS, if you don't live long enough, neither you nor your heirs get anything. Increases in the statistical life expectancy will only slowly increase the effective threshold age of no SS return.

"I'm also curious why you believe that people would retire at the same age regardless of when their SS or other benefits started...."

That's not what I claimed. What I'm saying is that with 70% starting SS at 62 with a full payout age of 67, an increase to a full payout age of 68 will still leave most starts at 62 (assuming it remains the minimum age with a larger reduction in payout). People don't voluntary retire and start SS at 62 unless their job prospects or health demand it, as their financial standard of living almost certainly will fall.

Regards, Don


John writes:

Let them die and decrease the surplus population. Some folk say cut all social programs ss, medicare, general assistance and ad nasuem... No one seems to have a alternative. Save your money... Some folk can not save, whether it be from a lack of will power or the fact that their chosen profession is sweeping outhouses doesn't afford them the luxury of saving. Mandatory saving from paychecks, redeemable only at retirement. Say 10 percent of gross earnings. Transferrable into a monthly stipend at 62. With the clause that states " you may increase your contribution up to ??" Have the funds that are available only to that local area. Light, gas, and so on. Transferrable to whatever locale that the participate may relocate to. Have the administration costs borne by the enrollee. Adminstration costs would be collected either by paycheck deductions or by the enrollee paying their monthly utilities bill. Convoluted? Yes, but no more that the tax code, or any other federal program. And the real beauty is that this manadtory savings plan involves local, versus federal or state involvement. Lots of holes, I know this, but with some tweaking here and there it might be a answer.... Love John PS But then I may be wrong.

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