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Wednesday, November 14, 2012

The Costs and Benefits of Raising the Retirement Age

The proposal to raise the retirement age for Social Security (as opposed to, say, raising the payroll cap) is sure to come up during budget negotiations. It always does, and already has. Here's a very old post (from 2005, with a few minor changes) on that topic:

A recent 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. ...
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. 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, and they do, 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? I don't think so. ...

A comparison of the costs and benefits or raising the payroll cap -- which mostly affects the well-off (hence their continued push of other alternatives that shift the costs elsewhere) -- leads to a different conclusion, at least for me.

[Update: I don't get it either when looking just at the numbers, but looking at it through an ideological lens explains the desire to make people believe that Social Security is in serious trouble, and hence in need of serious cuts. Starve the Beast through tax cuts or deception, it doesn't matter, the point is to reduce the government's provision of social insurance by whatever means gets the job done.]

    Posted by on Wednesday, November 14, 2012 at 11:49 AM in Economics, Social Insurance, Social Security | Permalink  Comments (37)


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