Brief #19 in the Retirement Policy Project series.
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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.
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
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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