Raising the US Retirement Age Could Save Billions in Social Security Payments

Raising the normal retirement age in the United States to age 70 couldsave the federal government billions of dollars each year and help shoreup the ailing Social Security trust fund over the long term, accordingto two university researchers.

Increasing the normal retirement age would be a plausible move becauseAmericans are enjoying longer, healthier lives, said demographer KennethG. Manton of Duke University and actuary H. Dennis Tolley of Brigham YoungUniversity. They said that the Social Security trust fund could save roughly$50 to $60 billion on each year's group of workers by requiring them towait until age 70 to receive full Social Security benefits, instead ofthe current retirement age of 65.

And those savings "only represent part of the benefit of such anincrease in retirement age in that not only would expenditures not be made,but persons who did continue to work would contribute to revenues throughincome and other taxes," the two researchers wrote in a report preparedfor the Social Security Administration, which funded the study. They saidthat each year of age increase in the retirement age decreases paymentsfor a year and increases revenues for a year.

To come up with their findings, Manton and Tolley studied health andmortality data from several National Long Term Care Surveys--longitudinalsurveys of the elderly population of the United States sponsored by theNational Institute on Aging--as well as information on Social Securityand disability insurance payments. On average, they said, increasing thenormal retirement age to 70 could save 95 cents of every dollar now spenton people 65 to 69 years old who have retired with full Social Securitybenefits. The savings would not be nearly as great if there were a largeincrease in disability payments for workers once they pass age 65, butthat has not been the case, the researchers said.

In their report, the researchers noted a number of variables that couldaffect their calculations. One is the "likelihood of persons optingto continue to work at later ages. Even the conditions for this seem tobe changing as the physical requirements for occupations on average seemto be declining in the emerging 'information' age."

Another variable is whether the US economy could continue to provideenough jobs. An increase in the retirement age from 65 to 70 would implya need for roughly 10 million new jobs, Tolley and Manton wrote. They pointout that "if the median age of the US population keeps increasing,then part of the jobs creation problem would be solved by a job shift (ie,older workers would have to assume the job slots for younger workers ifthe number of younger workers decline).

"Furthermore, it may be that full-time employment at ages 65 to70 might be defined to be a 32-hour work week."

Limited Changes in Retirement Age in the Offing

Manton noted in an interview that limited changes in the normal retirementage are forthcoming. Based on government action taken in 1983, the normalretirement age would begin to rise to 67 after the turn of the century.In addition, the Kerry-Danforth commission has studied a proposal thatwould hike the retirement age to 70, and Manton said that he's even heardtalk of raising it to 72.

He acknowledged that it's hard to predict how such changes would bereceived by the American public.

"The trend actually has been in recent years that the proportionof people retiring not just at age 65, but at 62 and 59, has increased.But part of the reason why this has occurred is because some retirementprograms were set up to provide incentives for early retirement,"he said. "For example, we've had a period of downsizing and otherfactors to reduce the employment rate and to get workers who aren't currentlytrained for the current positions out of the labor force.

"Certainly, I think the incentives would change if you raise notjust the normal retirement age but also the age at which you can get partialpayments."

With baby boomers approaching retirement age, the federal governmentmust act to meet the future needs of the Social Security trust fund, Mantonsaid.

"Assuming that fertility stays at a fairly moderate level and youget these large baby boom cohorts becoming eligible in 2011--when theyfirst pass age 65--something more than a simple tax rate change has tobe done. Or if you do it only by a tax increase, then you get a very hightax burden that could potentially slow down the growth of the US economy,"he said.

Manton said the United States isn't the only country dealing with thisphenomenon.

"It's a problem for most developed countries where fertility isdampening out and older populations are growing rapidly. It's already happenedto some degree in some of the Scandinavian countries."

In Japan, a study estimated that 24% of the country's population mightbe over age 65 by the year 2025. One response has been for older managersin Japan to continue working as senior consultants, but for fewer hourseach week, Manton said.

Raising Retirement Age Could Lead to Other Changes

Raising the normal retirement age in the United States could lead toother changes, Manton added. Workers could be encouraged to take leavesfrom careers in mid-life to be retrained or to return to college. "Thatmay become a necessity, if the rate of technological change is rapid enough,"he said.

And the federal government may need to mandate other changes to keepolder people in the work force longer. That might mean setting a fixednumber of years that a person could be eligible for Social Security payments,he said.

Tolley noted in an interview that one of the problems with implementingan older retirement age is that many people in the United States feel entitledto a Social Security benefit when they reach age 65. Those people stillmight choose to retire at 65, even though they will be penalized for doingso, or they might even file for disability benefits, Tolley said.

"Changing feelings of entitlement could have a significant impacton actual realized savings," Tolley said. "This impact couldbe positive or negative."

Manton noted when the Social Security system was established in themid-1930s, people did not live as long, and therefore, had fewer yearsof retirement. Now that people live longer than was initially contemplatedwhen the program was created, the government must develop a policy thatreflects the reality of changing life expectancy and health status, Mantonsaid.

The average life expectancy in the United States today is about 75.5years--slightly over age 73 for men and about age 79 for women. The averagelife expectancy was 61.7 years of age when Social Security was passed intolaw in 1935.