Raising the Social Security Retirement Age: A Cut in Benefits for Future Retirees

According to the Social Security Trustees, the Social Security Trust Fund will be able to pay full benefits until 2037, and incoming payroll taxes will be sufficient to pay about 78 percent of benefits thereafter. Some are using this modest gap in long-term funding as a pretext to justify proposals for large cuts in Social Security benefits destined to reduce the federal deficit. One frequently discussed change to Social Security is to increase the age at which a retiree receives full benefits. For most workers, increasing the retirement age will result in a cut in benefits. It is therefore not surprising that this proposal is very unpopular with the American public.

Retirement Age Has Already Been Increased

The retirement age for full Social Security benefits has already been increased from 65 to 67 for anyone born in 1960 or later. This increase was enacted in 1983 as part of comprehensive legislation to strengthen Social Security's financing at a time when the program was facing an imminent financial crisis. The increase in the full retirement age is being phased in slowly based on a person's year of birth.

This increase in retirement age resulted in significant benefit cuts for anyone retiring before their new full retirement age. For example, when the full retirement age was 65, workers retiring at age 62 received an initial benefit that was 20% less than their full benefit amount. When the full retirement age reaches 67, workers retiring at age 62 will receive a 30% cut in benefits.

Despite these benefit cuts, most workers today retire before their full retirement age - often at 62 - and live on reduced benefits through their remaining lives.

Impact of Raising the Retirement Age Beyond Age 67

Some people support raising the age of eligibility for full retirement benefits to 70 or even 72 as a way to reduce the deficit or increase Social Security's solvency. As in the past, these proposals to raise the retirement age come with an additional reduction in benefits. The effect of increasing the retirement age to 70, for example, would lead to an additional 13 to 15 percent reduction in benefits at 62. When added to the previously enacted benefit reductions for early retirement outlined above, the total reduction for a person who retires at age 62 could be as much as 43 to 45 percent.

Proponents of increasing the retirement age argue that people are living longer, and, therefore, can continue working for more years. Although it is true that people, on average, are living longer, these longer life expectancies are by no means across-the-board. Studies have shown a strong correlation between longevity and income. That is, most of the increase in life expectancy for those who reach age 65 is enjoyed by workers with higher incomes. This is not surprising considering they are less likely to have physically demanding jobs and more likely to work in jobs with high-quality health insurance coverage.

It is also important to recall that not everyone is healthy enough to continue to work even if they would prefer working into their later years. This is especially true of workers with physically demanding jobs. While fewer factory jobs exist today than in the past, many service jobs are backbreaking, including nursing and nursing home care, janitorial jobs, outdoor service jobs, waitressing, or any job where workers have to stand on their feet all day. Millions of American workers have these jobs, and asking them to work an additional 3 or more years is often simply not possible for them physically.

Finally, while many older workers may be healthy enough to work, jobs for them may simply not exist. Although high-income professionals are often encouraged to continue working indefinitely, few employers are eager to employ 70-year-old blue-collar or service workers. In fact, older workers are typically among the first targeted for buy-outs or reductions in force when the economy contracts, and are rarely recruited by employers absent a severe worker shortage. Although studies have shown the many contributions older workers bring to their employers, most companies remain focused on the bottom line - which typically reflects higher health insurance costs for older employees. Today's technological changes can also be challenging to an older workforce unless an employer prioritizes training. Few employers are willing to invest the significant amounts that would be needed to recruit or retain older workers when qualified younger workers are available to fill those jobs.

For these reasons, unless there is a dramatic change in employer attitudes or in the structure of our workforce, most workers will continue to retire well below their full retirement age. Despite the impression left by some, the average Social Security retirement benefit today is modest - only $13,800 per year overall with an average of only $11,800 per year for women. Cutting these benefits essentially in half will result in millions of today's workers facing poverty at retirement.

Conclusion

Although economists and other professionals have proposed raising Social Security's retirement age, such a dramatic change should not be made without careful consideration of what it will mean for millions of America's workers. Instead of protecting future generations, raising the retirement age will in fact mean dramatic benefit cuts for the younger generation many claim they wish to defend. It will mean especially deep cuts for those who can afford them the least - lower income workers who are less likely to be able to continue working to age 70. Considering the modest nature of Social Security's existing benefits, cutting them further, no matter how it is accomplished, should not be the first or even the last place Congress looks for budget savings.

Government Relations and Policy, August 2010