Would Raising the Social Security Retirement Age Harm Low-Income Groups?

Brief #19 in the Retirement Policy Project series.

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Abstract

Social Security's projected financial shortfall has spurred discussions about increasing the age at which workers can first receive retirement benefits. This brief examines the future distributional impacts of raising the retirement age by about three years. Raising the retirement age hits lower-income workers less hard than other groups because the disability program provides some protection. However, it still increases poverty rates. Combining the retirement age change with an enhanced minimum benefit increases lifetime benefits for the lowest earners and substantially cuts the Social Security deficit without significantly increasing poverty rates.

Introduction

Social Security's projected financial shortfall has spurred discussions about increasing the age at which workers can first receive retirement benefits. A major reason for the shortfall is one of the most positive developments of the last century: people are now living longer. Since Social Security's inception, life expectancy at age 65 has increased by almost 4.5 years for men and over 5.5 years for women (Board of Trustees 2006). A higher Social Security retirement age would bolster the system by reducing benefits and encouraging people to work longer. In addition to helping Social Security, working longer would also improve individuals' own retirement finances, by generating more retirement wealth and reducing the number of years their wealth needs to fund.

But would raising the retirement age disproportionately hurt vulnerable populations? Since lower-income groups have shorter life expectancies than higher-income groups, raising the retirement age may reduce their retirement years by a greater percentage. Also, lower-income groups depend more on Social Security than higher-income groups, so any reduction in benefits may have a greater impact on their retirement resources.

This brief uses the Urban Institute's Dynamic Simulation of Income Model (DYNASIM3) to examine the future distributional impacts of raising the retirement age by about three years. We find that increasing the retirement age reduces lifetime benefits for all groups, but reduces benefits less for those with lower lifetime earnings and less education. The policy change does not disproportionately reduce lifetime benefits for lower-income groups because the Social Security disability program provides some protection. Disability beneficiaries are unaffected by the retirement age change and tend to be lower income. Also, much of the life-expectancy differences across groups occurs before retirement age is reached.

Still, we find a higher retirement age increases the number of older Americans living in poverty, as would many policy changes designed to improve the system's solvency. One way to maintain progressivity would be to combine the change with an enhanced minimum benefit for lower earners. We find combining the retirement age change with an enhanced minimum benefit increases lifetime benefits for the lowest earners and substantially cuts the Social Security deficit without significantly increasing poverty rates.

Pros and Cons of Raising the Retirement Age

The advantage of raising the retirement age, compared to other options for balancing Social Security, is that it would encourage people to work longer. By delaying retirement, workers avoid early retirement reductions to Social Security and defined pension benefits, accumulate more Social Security and pension credits and other savings, and reduce the number of retirement years that they must fund. By working until age 67 instead of retiring at age 62, for example, a typical worker could gain about $10,000 in annual income at age 75, significantly reducing the likelihood of falling into poverty at older ages (Butrica et al. 2005). Further, working longer would increase the total production of goods and services in the economy, enhancing living standards and raising government revenues that fund services including Social Security. If raising the retirement age led all workers to delay retirement by even one year, the additional payroll and income tax revenue generated could be as much as 28 percent of the annual Social Security deficit in 2045 (Butrica et al. 2006).

An important concern with increasing the retirement age is whether it would place special burdens on low-income retirees who generally do not live as long as other retirees and typically depend more on Social Security. For example, life expectancy at age 30 for today's young workers is 4.7 years shorter for those without high school degrees than for college graduates (table 1). Social Security is projected to provide over 50 percent of aggregate retirement income for workers in the bottom fifth of earners as compared with 24 percent for those in the top fifth, and 44 percent for African Americans as compared with 32 percent for non-Hispanic whites. Almost any across-the-board reduction in benefits, including raising the retirement age, could disproportionately affect the retirement incomes of groups that are more reliant on Social Security.

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