Ezra Klein has written his latest Washington Post column on why we should not raise the Social Security retirement age:
Lurking beneath this conversation is an unquestioned assumption: We live longer, so we should work longer. That’s pretty intuitive to members of Congress, who seem to like their jobs and don’t seem to like the idea of retiring. It’s also pretty intuitive to blogger/columnists, who spend their time in air-conditioned rooms opining about pension programs. But most people don’t work in Congress or in the media. They work on their feet. They strain their backs. They’re bored silly at the end of the day. By the time they’re in their 60s, they want to retire.
You see that reflected in Social Security. Age 66 is when you get full benefits. But most people begin taking Social Security at age 62. They get less, but they can retire earlier. To them, the trade-off is worth it. And remember, the country is much richer than it was in 1935. Adjusting for inflation, our gross domestic product in 1935 was $865 billion. In 2009, it was more than $12 trillion. We have more than enough money to buy ourselves some leisure time at the end of our lives. At least if that’s one of our priorities. [Emphasis added.]
I’m actually not sure it is far to suggest that most people work physically demanding jobs, but Ezra certainly raises an important point. I will add, however, that the upshot of our increased affluence isn’t obvious. One could argue that a safety net program in a more affluent society can afford to be less generous. Richer households can save more, and at least some retirees can rely on richer children. (See Michele Boldrin et al. on “Fertility and Social Security.”) That is, a more affluent society can afford “progressive price indexing” and other measures that trim the generosity of the program for the well-off. Given the changing demographic composition of our population, we could also argue that addressing high rates of child poverty is a more urgent priority than indiscriminate generosity towards retirees.
To be sure, one could argue that we ought to address all of these priorities by raising the tax burden. But as Ezra observes in his column, this is complicated by the changing U.S. dependency ratio. The number of workers to retirees is shrinking. So while we certainly can raise taxes,.doing so will cause a number of other problems, e.g., dampening consumption in an age of private deleveraging. If we’re concerned about the birthrate, an important part of the Social Security picture, raising taxes on prime-age households could also have the perverse consequence of delaying and discouraging child-rearing.
All that said, raising the Social Security retirement age isn’t necessarily the best reform strategy. Where Ezra and I part company is on the question of whether or not we think it’s appropriate to spend less on the program.
Consider one idea that has gotten more attention lately: hiking the official retirement age to 70. This could leave a gaping hole in the safety net in very old age as early retirement penalties reach 43% for those who opt to claim benefits at 62.
On the other hand, hiking the earliest eligibility age from 62 to 65 in tandem with an increase in the official retirement age from 67 to 70 would pull away the floor of income support for those in their early 60s and still exact a severe 30% early retirement penalty from those retiring at 65.
Such an increase in the early eligibility age would only underscore the unfairness of a big, across-the-board hike in the retirement age, since gains in life expectancy are disproportionately enjoyed by higher earners who generally have the pension savings and range of work skills to allow them to rely less on Social Security in their early 60s.
Yet Graham offers a solution that will nevertheless yield considerable savings:
In “A Well-Tailored Safety Net,” I introduce a new solvency approach called Old-Age Risk-Sharing, under which the steepest benefit cuts would come in the initial year of retirement; the cuts would be progressively smaller for lower earners; and they would gradually unwind over 20 years to provide robust support for retirees of all income levels in very old age, when almost everyone will depend on it.
Under Old-Age Risk-Sharing, a career-average earner ($42,000 in 2009) retiring after 2032 would face an upfront benefit cut of 20%, which would gradually unwind over 20 years to keep the safety net intact. However, thanks to enhanced incentives for delayed retirement, that worker could fully overcome this upfront cut and attain an extra measure of income security in very old age by working two years past the official retirement age.
A lower earner would face a 10% upfront cut that could be overcome with one extra year of work, while a high earner would need to work three extra years to overcome a 30% upfront benefit cut.
Graham’s approach is compatible with a very modest increase in the retirement age:
While the earliest retirement age would have to rise to 63 to limit the maximum early retirement penalty to 30%, this could be done in a way that preserves 62 as the early eligibility age, with benefits ramping up as careers wind down. Workers could still be eligible to receive 75% of their benefit at 62, with full eligibility phasing in by age 68.
It’s also worth noting that Social Security has been reformed a number of times since its inception. Some reforms have proven very harmful, e.g., the 1977 reforms introduced by the Carter administration, which Greg Mankiw described in a speech to the Council on Foreign Relations in 2005 [PDF]:
This current system of indexing initial benefits to wages has not been part of Social Security since its inception. In fact, it was introduced by the Carter Administration in 1977. At the time, some leading experts on Social Security objected to this change, arguing that it would put Social Security on an unsustainable path. In a prescient letter in the New York Times (published on May 29, 1977), Peter Diamond, James Hickman, William Hsiao, and Ernest Moorhead wrote, “the wage indexing method calls for a much larger growth in benefits for future retirees at a time when the country may not be able to afford it. … Only a Social Security system without a large deficit on the horizon can have the flexibility to deal with this and other needs. It would be sad if the legacy of a particularly forward-looking President [Carter] were a political nightmare.” Despite their advice, President Carter signed into law the indexation regime with which we are still living.
At the very least, it’s worth asking whether or not we should keep the Carter-era reform in place. Keep in mind that the Carter-era reform led to the large increase in the Social Security payroll tax in 1983.