Should we raise the Social Security retirement age? The clear reason to raise the retirement age is that life expectancy has increased, which threatens the long-term sustainability of a PAYGO public pension system. Yet many object that some workers are engaged in physically and emotionally demanding tasks, thus making an increase in the retirement age an unconscionable imposition.

A few quick thoughts:

(1) It seems entirely reasonable for people engaged in physically and emotionally exhausting work to go on disability once they reach the age of 62 or 65. This shouldn’t have any bearing on the default retirement age if we have good reason to believe that a large majority of workers born in the 1970s and later can remain productively engaged in the workforce past today’s retirement age.

(2) We don’t necessarily have to set a fixed retirement age. The Swedish system of NDC accounts is a good model for reform: 16 percent of income is collected into a notional defined contribution (NDC) account. At retirement, this NDC account is converted into an annuity. The rate of return in the account is linked to economy-wide measures, including the rate of income growth in the working age population — basically, the pension system can’t outgrow the economy, thus guaranteeing that the program will prove sustainable. One can start drawing funds from the account at 61, but drawing funds later on will lead to a larger benefit. This creates a powerful incentive for workers to remain engaged in the labor force. The Swedes also have a means-tested guaranteed pension benefit funded out of general tax revenues that protects low-income workers, an idea that could be a component of a wider reform.

(3) Phil Longman had a very clever spin on this idea: Early Retirement Accounts:

The idea is to allow all US workers to divert a portion of their payroll taxes into personal “early retirement accounts”, which would give individuals more control over their financial destiny and the timing of their retirement. In exchange, the age at which Social Security benefits kick in would be pushed back several years, but without any cuts in monthly benefits thereafter.
At a stroke, this proposal overcomes the most serious objections to privatisation plans. Although such a system would require some initial borrowing, it more than pays for itself over time. Say, for example, that individuals were allowed to divert one-sixth of their payroll taxes into early retirement accounts. Suppose further that the minimum age for receiving a Social Security pension rose from the current 62 to 68, and that the threshold for full benefits increased from 65 to 72. The Social Security Administration’s Office of Policy estimates that the savings from this extension in the retirement age would not only cover the full cost of the early retirement accounts, but would also make the system solvent in the long term.

There are a variety of approaches. But the main thing is that we don’t have to just raise the retirement age — there are a variety of steps we could take to make the system fairer, more flexible, and, most importantly, more sustainable.