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Tuesday, November 20, 2012

Should the Retirement Age Be Raised to Help Balance the Budget?

During President Carter's administration in the 1970s, the age at which a person can receive full Social Security benefits in the United States was raised to 66 for people born between 1943 and 1954 (basically the early baby boomers), and incrementally up to 67 for people born since 1960. People in those birth cohorts can still retire as early as age 62, but your monthly benefits are reduced because the actuarial principal is that no matter when you retire from age 62 on, you will receive the same total payout from the government. For this reason, the impact of further raising the age at which full benefits may not be very large. Rather, the short-term goal should be to keep people in the labor force as along as possible because that means that they are continuing to contribute the very payroll taxes that are being paid to the current Social Security beneficiaries.

Paul Krugman of Princeton University and the New York Times had a different take this week (as on previous occasions) on why the so-called retirement age should not be increased. He argues that life expectancy beyond age 65 has not increased enough, especially among minority group members, to justify this increase in the retirement age. So, I went back to the life expectancy data from the National Center for Health Statistics of the US Centers for Disease Control to see if that was true. Life expectancy didn't change much between 1935 when Social Security was designed, and 1950, when comparable data for more recent periods became available. In 1950, life expectancy for a 65 year old white female was 15.1 years and that increased to 20.4 in 2009 (the most recent year available), for a 5.3 year gain. For white males the gain in life expectancy over that 59 year period was 4.9 years. For African-American females the gain has been 4.4 years and for African-American males it has been 2.9 years. We don't have that same time series for Hispanics, but the current data suggest that Hispanic elders have a higher life expectancy at age 65 than non-Hispanic whites, so we can conservatively apply to them the trend shown by non-Hispanic whites. 

The conclusion: Since 1935 the age at eligibility for full Social Security benefits has increased by only two years--from 65 to 67. Yet, even for the most disadvantaged group--black males--life expectancy at age 65 has increased by nearly three years. Thus, the recommendation of President Obama's Deficit Reduction Commission that the retirement age be increased by another year (to 68) by 2050 does not seem unreasonable.

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