It is possible that the retirement age for Social Security may have to be increased, but we should at least take the time to figure out why.
Social Security faces a large gap in its finances. The program has promised more than it expects to be able to pay.
The Social Security Trust Fund acts as a buffer against this gap. In the big picture - even at $2.8 trillion – this reserve provides less than a quarter of solution for every dollar of problem – that is a statistical best case.
Many politicians believe that the best way to deal with the remaining gap is to raise the retirement age for Social Security. This approach has two problems:
1. The policy option isn’t very effective; and
2. It does not deal with the root cause of the financial imbalances.
The solution doesn’t fix Social Security as much as it distributes its brokenness.
Advocates of the idea usually justify this reform because life spans are rising. Supporters argue that the increase in life expectancy means payments from the program must cover more years, even though the number of years we expect workers to remain employed will remain unchanged. That just doesn't add up.
Increasing life expectancy does not necessarily mean that the program has to cover more years of benefits. Medical science allowed my brother to live 20 additional productive years, in which he contributed to Social Security all but one. He passed away at 44 without collecting a penny in benefits. His longer life made Social Security more solvent rather than less.
It is important to understand what a longer lifespan means in the course of a person's life. In 1940, the average 21-year-old worker had about a 50 percent chance of living to retirement age. By 1990, the figure had increased to around 75 percent. The figure has since risen above 80 percent.
Clearly, there is a significant increase in life expectancy at a time when we are generally contributing to the system.The life expectancy of a retiree has also risen since the inception of the system. That increase is, however, a fractional round-off compared to the increase in the system's cost. Yes, we are drawing more in benefits. No, it is not significant relative to the increase in what current workers are contributing.
No one knows how long we will live in retirement. The Social Security Administration provides a guess in Actuarial Study No. 120. In that study, the life prospects of a retiree in 2050 are not terribly different from retirees in 2000.
Yes, the 2050 retiree collects about a half year of additional benefits, but he or she has to contribute to the program for 2 additional years. It is close to a wash.
Yes, living longer in retirement is a problem. No it is not materially related to the projected life expectancy of future retirees. As a policy, increasing retirement age on current workers is not much more reasonable than reducing the benefits of people because they are left-handed.
We are looking at the wrong problem. It is not how long we are living in retirement. The problem is the number of people reaching retirement. In 1940, we had a lot of people who died without collecting anything. Today, most people expect to live through their working years into retirement.
A program like Social Security can work well when it can concentrate the contributions of the many on those that survive long enough to collect. Increasing life expectancy near retirement tends to dilute the system’s ability to concentrate resources. This is a problem.
If we are raising the retirement age for people so that the system can concentrate resources on older Americans, the policy may make sense. Today, it is under consideration so that politicians do not have to admit there is a problem.
Author’s Note: Some are questioning the fairness of this solution because the increase in life expectancy has not been equal across all wage spectrums. Here is an example.