The United States Social Security System Retirement Age

The Washington-based American Academy of Actuaries (AAA) recently released an updated version of its Issue Brief Raising the Social Security Retirement Age. The AAA had previously issued a public policy statement in 2008 advocating for an increase in Social Security’s normal retirement age. According to the current Issue Brief, “Social Security is not in an immediate solvency crisis, but it does face a major financial challenge in that projected income over the next 75 years is well short of the level needed to pay current formula benefits”. Surprisingly, for an influential AAA publication, the precise meaning of “well short of” is not discussed in the Issue Brief. However, the latest Trustees Report discloses that the shortfall in revenue to meet scheduled benefits over the next 75 years amounts to 19.56% of the actuarial value of the projected benefit obligation; the corresponding shortfall amounts for the next 50 and 25 years are 16.95% and 10.59% respectively. The Issue Brief states  “The fact that increased longevity is among the root causes of Social Security’s financial problems suggests that raising the normal retirement age is a likely, perhaps even necessary, component of any package of program changes that addresses them”. The premise that raising the normal retirement age is “perhaps even necessary” is subject to multiple challenges from a public policy viewpoint, particularly regarding health and labor issues relevant to cohesive social and economic objectives. The amounts of projected shortfalls can be addressed in alternative ways, without imposing the “perhaps necessary” cuts in scheduled benefits that would be represented by raising the retirement age. The Issue Brief acknowledges that its recommendation is “Essentially a cut in benefits” and addresses the labor issue by stating “Jobs may not be available” adding that it “Disproportionally affects low-wage workers”. However, it appears that the AAA’s advocacy accepts these adverse conditions as a trade-off for reducing the amount of the actuarial balance shortfall by raising the retirement age.

The Social Security Full Retirement Age has been increased in the past from 65 and will increase by year of birth until it reaches 67 for persons born in 1960 and later. Advocates of increasing the normal retirement age beyond 67 point to the effects of a secular trend in declining mortality rates and the corresponding increase in life expectancy from generation to generation. From a narrow limited actuarial perspective, there is a certain logic to the concept of increasing the normal retirement age to counterbalance the financial effect of improving longevity. However, economists often take a much broader view and tend to consider the economic and social aspects of proposals for changes to the normal retirement age in addition to their financial effect. The June 2009 edition of Commentary with the title Retirement Age from the Viewpoint of Economic and Social Policy contained the following observations on the topic with attribution to the Washington-based Economic Policy Institute: Retirement security is declining as fewer individuals are covered by traditional defined benefit retirement plans and older persons face rising health care costs; life expectancy should not be viewed in isolation; other long-term trends have had an important financial effect on Social Security’s finances; aggregate Social Security contributions have grown faster than life expectancy at retirement; today’s workers pay more into the system; they live longer than previous generations, work more hours and retire later; working women have helped to strengthen Social Security finances; today’s employed generation works six days more a year than the generation of sixty years ago due to women’s participation in the labor force; forcing people to work longer may hurt those it is meant to help; retiring early makes sense for workers with shorter life expectancies; raising the retirement age would hurt those who have little choice due to poor health or little prospect of employment; raising the retirement age would hurt low-income and minority workers; most of the increase in life expectancy in recent decades has been among higher-income workers; the shortfall has more to do with widening income inequality and other labor market factors; earnings of most workers have stagnated except for higher-income workers; earnings above the current limit of $147,000 are not subject to the Social Security payroll tax; it makes no sense to cut benefits at a time when retirement insecurity is rising. 

Other changes, including an increase in the payroll tax rate and raising the limit on taxable earnings, together with implementing comprehensive health care reform, are more aligned with national social and economic policy needs. The United States does not have an automatic balancing mechanism for its Social Security System, unlike many other countries. Such a mechanism could be designed so as to trigger timely automatic incremental revenue requirements towards achieving long-term financial adequacy unless Congress acts to make parametric adjustments to the system of benefits and revenues to manage its financial sustainability and extend its projected period of years of solvency.