The Fiscal Times

Social Security: A Consensus Based on Confusion—Part I

This is the first in a two-part opinion piece published in The Fiscal Times. "A Consensus Based on Confusion - Part II" was published July 20, 2010.

Almost everyone seems to agree that the United States has a long-term budget problem. They do not, however, agree on what to do about it—mostly. In one area, consensus seems to have emerged—at least among budget analysts: raise the Social Security retirement age. Three reasons are advanced:

  • People are healthier and living longer than in the past. Accordingly, they can work longer.
  • Deficit reduction must have bipartisan support to pass. Conservatives will not support a plan that does not cut entitlements.
  • Cuts in Social Security can help meet President Obama’s target of cutting the deficit to 3 percent of GDP by 2015.

Behind those reasons, however, lies confusion—about how Social Security works, about when people actually retire, about what ‘raising the Social Security ‘retirement age’ means and whether doing so would influence when people actually retire, and about whether and how much cuts in Social Security are likely to contribute to reducing the deficit by 2015. Raising the retirement age is an inferior way of dealing with the genuine budget challenges that the nation faces. Tomorrow, I’ll describe why the case for cutting Social Security benefits is weak but that, if benefits are to be cut, there are better ways to do it.

First some facts. For a 65-year-old retiree with average annual earnings—just over $40,000— Social Security replaces 40 percent of earnings in 2010. This ‘replacement rate’ is lower than that in most other developed countries—25th among 30 OECD nations for workers with average earnings—and lower than it has been in the past. It will fall still more under legislation enacted in 1983 but not yet fully implemented. Nonetheless, Social Security accounts for more than half the income of roughly three-fifths of people over age 65.

People may first claim Social Security retirement benefits at age 62. If they wait—up to age 70—they receive larger checks. Waiting to age 66 boosts benefits 33 percent. Waiting to age 70 boosts benefits 76 percent.

Under the 1983 legislation, age 66 is now called the ‘full-benefits’ or ‘normal retirement’ age. There is, in fact, nothing ‘normal’ about claiming benefits at age 66. Most people claim benefits at age 62 or shortly thereafter, and 95 percent have claimed by age 66.

‘Raising the retirement age’ could have two different meanings. First, it could refer to raising the age at which people can initially claim benefits—from 62 to some later age. It might seem that raising the age of initial eligibility would save money, but it doesn’t. On average, the higher monthly payment just about compensates delayed claimers for the shorter period over which they will receive benefits. As a result, this change would do nothing to lower the long-term cost of Social Security and little to lower deficits. For that reason, few people are talking about raising the age of initial eligibility, even though it could have a large impact on when people actually retire. Because Social Security benefits account for so much of most people’s retirement income, many retirees wait until Social Security is available.

When people talk about ‘raising the retirement age,’ they typically mean the ‘full-benefits’ or ‘normal retirement’ age, now 66 and set under current law to go up to 67 for people born after 1961. Raising the ‘full benefit’ or ‘normal retirement’ age sounds like it has a lot to do with retirement. It doesn’t. Because retirees would lose some of the higher benefits for claiming later, it is simply an across-the-board benefit cut—roughly 6.66 percent for each year the ‘normal’ retirement age is increased. Thus, raising the’ full benefits’ age by, say, three years is nothing more or less than an across the board benefit cut of 20 percent.

But—and here is the key point—people would still be able to claim benefits at age 62. Although the reduced benefit might cause some workers to delay actual retirement, studies indicate that because most of the pension would remain available, the effect would be small—roughly four months among men without disabilities, as estimated by Gary Burtless and Robert Moffitt in the Journal of Labor Economics in 1985, the most recent data available.

The argument for cutting benefits across the board—misleadingly called ‘raising the retirement age’—is based on a substantial disconnect between the proposed policy change and the rationale that it would encourage workers to delay retirement. There are three larger questions, to be addressed tomorrow: Should benefits be cut? If so, is cutting them across the board the best way to do it? Will benefit cuts help meet the deficit reduction targets?