The Costs and Benefits of Raising the Retirement Age

This article claims that raising the retirement age is the most obvious solution to solvency problems for Social Security. While I don’t agree with the doomsayers on the solvency issue, it is still worthwhile to look at the costs and benefits of such a proposal. First, here’s the article:

Why not raise retirement age? - Expert says it would fix Social Security, but it’s political trouble, David Gregory, NBC News: The idea of raising the retirement age has somehow been lost in the debate over changing Social Security for today’s workers. And yet it seems to be the most obvious. … The Social Security retirement age is now 65, but it's slowly going up. For those born in 1960 or later it will be 67. But experts say you would have to raise it quickly to 72 over the next several years to make a real dent in the program's shaky finances. … President Bush has said all ideas to shore up the program are on the table. And yet few discuss raising the retirement age. That's because in effect it's a benefit cut, just one of the reasons it's political trouble. Among other reasons … raising the retirement age would be especially hard for blue-collar workers … Critics also say once you start raising the age, you can't stop if you want to keep up with the shifting demographics. ...

Is raising the retirement the most obvious solution? There are two benefits with respect to solvency. Because people work longer, raising the retirement age increases revenues coming into the Social Security system. Second, because people retire later, the payout to retirees falls.   

But what are the costs?

1. An increase in life expectancy does not necessarily imply that people are healthier at age 65 or 70 than before. Suppose, for example, that medical advances are discovered that extend the end of life by several years, but have no effect on health prior to the last few years of life. In such a case there would be an increase in life expectancy, but no increase in the health of workers at the age of retirement. If people aren’t healthier, then increasing the retirement age imposes a hardship over and above that faced by current retirees.

2. It’s already difficult for elderly workers to find employment, and when they do they are often underemployed relative to their skill levels. Raising the retirement age will make this worse.

3. As noted in the article, what about workers employed in physically demanding occupations? Is it reasonable to ask them to work until, say, age 72? If not, how equitable is it to have some workers work until 72, and others allowed to retire at a younger age depending on their occupation?

4. Will this distort occupational choice decisions? Will workers, especially those who are seeking work in the years close to retirement, choose strenuous jobs in order to be allowed to retire earlier? How will we decide when a worker is unable to work due to reasons associated with age?

5. The life expectancy of some groups of workers is lower than for others. If poorer workers die younger than richer workers on average, then raising the retirement age will have a larger impact on low income workers and thus, in essence, be regressive.

Do the benefits exceed the costs? My choice would be to retire earlier rather than later even if that requires progressively higher taxes or means tested benefits.

[Update:  Robert Samuelson advocates raising the retirement age to 70 in his column today - he believes people should work as long a they are able to do so.]

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