Social Security is a terrific entitlement program. However, there seems to be some confusion over to what, exactly, one is entitled. Social Security’s primary component is The Old-Age and Survivors Insurance Trust Fund. It was created pursuant to section 201 of the Social Security Act Amendments of 1939 (superseding the Social Security Act of 1935) with the goal of preventing the elderly and infirm from living in poverty. There is nothing in section 201 (or any other section of the Act), which endows recipients with the inalienable right to golf, travel, and winter in Florida.
That was then, this is now
Yet when you compare the environment and expectations when Social Security began paying benefits in 1940 to today, it is evident that the program is serving a function far beyond what was intended. Let’s take a look at some data comparing 1940 to 1990; the most recent data the Social Security Administration has on its web site.
- In 1940, the percentage of adults (age 21) that survived to age 65 was 53.9% for men and 60.6% for women. In 1990 it was 72.3% and 83.6%, respectively.
- After hitting 65, the average life expectancy was another 12.7 years for men and 14.7 years for women in 1940. In 1990 was 15.3 years and 19.6 years, respectively.
- In 1940, the average age Social Security benefits were claimed was about 68. In 1990, it was less than 64.
In round numbers, that 50 year span saw the percentage of adults surviving to age 65 increase by a third and the length of time they spend drawing a Social Security check increase by 75%. Better nutrition, healthier working conditions, and medical advances leave today’s 65 year-olds considerably healthier and more vital than their counterparts half a century ago, and the jobs most Americans are performing are much less physically demanding. Simply put, Americans can work longer.
If the economics supported knocking off a bit early, that would be one thing, but of course, they do not. Within our successes lay the root of our Social Security problem. Lower birth rates and increased longevity have been aging our nation. Historically, age distributions have resembled a pyramid, with a large young base and gray peak. Now that pyramid is becoming inverted. In 1940, there were 42 workers for every Social Security recipient. In 1950, 16.5. Today it is 3.2, and by 2030, it is expected that there will be fewer than 2 workers for every recipient. By 2050, there may be more people running for condo president of Del Boca Vista, phase III (by then, more likely phase XXX), than in the workforce.
The full retirement age: today versus 1940
There have been many proposals to “fix” Social Security. A component in many includes raising the retirement age. “Raising the retirement age” has generally meant raising the full retirement age (FRA). (See an explanation of the different retirement ages.) A paper by the Urban Institute’s Melissa Favreault and Richard Johnson, reports that “[t]he full retirement age would have to increase to 73 for adults to have the same expected years of reaming life in retirement today as in 1940.”
Raising the early retirement age
Recently, there have been renewed calls to increase the early retirement age (Earliest Eligible Age – EEA), which is currently set at 62. A particularly compelling argument was made in Andrew Biggs’ paper for the American Enterprise Institute for Public Policy Research.
Biggs modeled a gradual increase in the EEA from 62 to 65 over the period 2015 to 2025. Extending the EEA did extend by five years – from 2037 to 2042 – the date by which the Social Security trust fund runs dry. Other impacts were far more consequential.
He estimates that the raising the EEA “would increase long-run GDP by 5.5%.” This translates into about $800 billion annually in today’s dollars. During the 10-year phase in period, he estimates that non-Social Security federal revenues would increase by $1.2 trillion; about six times as much as projected for the recent health care reform bill over a 10-year period. This additional revenue could be used to help shore up some troubled federal programs – like Social Security and Medicare.
The big beneficiaries of raising the EEA are Social Security recipients. The SSA advises recipients that by collecting at 62 instead of their FRA, their benefits will be about 25% lower. Biggs models the increase in both Social Security income, as well as the increase in defined contribution and defined benefit as a result of working longer and the shorter duration benefits will be spent down.
He looked at this a number of ways, but most interesting was the impact on the replacement rate; the percentage of pre-retirement income generated in retirement. Biggs compared the replacement rate at age 70 for the 1980 birth cohort retiring at age 62 versus age 65. (Biggs notes that though individual needs vary widely, financial advisors recommend a replacement rate of 70% to 80%; I generally consider 75% to be a minimum). Biggs calculated that the median replacement rate under current law for Social Security alone as 43%, and with the inclusion of pension/DC plan income it rose to 67%. When he modeled the increase in EEA to 65, the median replacement rates increased to 51% for just Social Security and 77% when pension/DC income was included (mean numbers were higher).
Opposition to raising the EEA
Clearly, raising the EEA benefits both Social Security recipients as well as the Treasury. This begs the question as to why the EEA has not been raised. Objections to raising the EEA are centered on those who are unable to continue working to age 65. The reasoning goes that those who can’t work the additional three years are more likely to work in physically demanding jobs and therefore more likely to be earn lower incomes. The conclusion reached is that raising the EEA hurts lower income workers and helps higher income workers. Research actually done on the subject, refutes this conclusion.
A 1996 paper (“Who Takes Early Social Security Benefits: The Economic and Health Characteristics of Early Beneficiaries”) by Richard Burkhauser, Kenneth Couch, and John Phillips found that “[i]n the years prior to acceptance men who take early Social Security retirement benefits are very similar to men who do not, in terms of health, income, and wealth…” They found that fewer than 1 in 10 were in poor health and had no pension. The Survey of Income and Program Participation (SIPP) conducted for the Congressional Budget Office “confirm that result.” The CBO report found that only 15% of respondents who claimed benefits prior to their FRA where either in poor health OR lost their jobs.
Protecting those in poor health
To protect those who are in poor health, Biggs suggests that Disability Insurance could fill the gap. Individuals who could not work past 62 “would receive benefits payable as of the FRA of 66 or 67 and thus would not suffer a financial penalty if forced to leave the workforce due to disability.” As even “blue collar” jobs become less physically demanding, the percentage of 62-64 year-olds left physically unable to work, will continue to shrink.
What if we extended the full retirement age?
It would be interesting if someone (Andrew?) modeled an increase in the EEA and an increase in the FRA to 70 (by say, 2040). Today, recipients born in 1943 and later can earn an extra 8% for each year they delay collecting benefits beyond their FRA up to age 70. I don’t know if the impact on federal revenues would be as beneficial as just increasing the EEA, but for those who can work until 70, they can enjoy at least a 25% increase in Social Security benefits by delaying retirement past the FRA.
What they are talking about in Washington
I only hope that the members of the National Commission on Fiscal Responsibility will read the Briggs report. The two retirement related ideas I have seen surface from their draft proposal thus far have been either disturbing or underwhelming. The first is eliminating tax breaks for employer sponsored retirement plans (discussed in my Nov 11 post). The second is raising the FRA to 69. My issue is not with raising the FRA to 69 (it should eventually go higher) but when they propose implementing the change; by 2075. 2075, really?
If recent trends continue, by 2075, 65 year-olds will just be moving out of their parents’ house and collecting Social Security will become the new young adult rite of passage.
Better take your vitamins.
For more on why raising the the early retirement age is a good idea, see Andrew Samwick’s post (titled appropriately, enough “Why Raising the Retirement Age is a Great Idea”) on Capital Gains and Games.