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The Big Downside of Raising the Retirement Age

Philip Moeller

Now that the post-election entitlements fights are back in the spotlight, raising the Social Security retirement age will return to center stage as one of the common prescriptions for closing the program's long-term funding gap. Increasing or entirely lifting the ceiling on taxable wages--set at $113,700 in 2013--is another frequently mentioned proposal. Further down on the list are measures to change the annual cost-of-living adjustment for Social Security recipients, restrict payments to high-income beneficiaries, and a slew of benefit tweaks that could have a meaningful cumulative impact on program finances.

Unlike the government's other big safety-net programs--Medicare and Medicaid--Social Security is not facing imminent funding problems. With no changes at all, the program projects that it will pay all benefits for more than 20 years and would then be able to continue paying out roughly three-quarters of benefits. Another misconception about Social Security is that it is floating in red ink. Actually, the program had a surplus of about $2.7 trillion in 2012. This cushion will grow further before being sapped by rising benefit payments triggered by millions of retiring baby boomers.

At first glance, raising the retirement age seems like a straightforward change that simply recognizes the demographic realities of aging. People are living longer than ever and are physically able to continue working into their 60s and even 70s. The economy will need more older workers, because retiring boomers are being followed by a much smaller generation of workers. Lastly, people will need to keep working more years for financial reasons--to recover from the recession and to fund retirements that will last a long time.

Social Security is one of the ways they will boost retirement earnings, of course. Most people earn more money later in their working lives than when they were younger. So adding several years to a person's Social Security earnings history is likely to boost their Social Security benefits when they do retire.

[See 10 Great Senior Discounts.]

So, what's not to like? According to a phalanx of liberal seniors' groups--foundations, think tanks, women's groups, and other Social Security "preservationists"--the longevity rationale for raising the retirement age is not a story that applies to lower-income and less-educated men and, especially, women. They would get hammered by raising the retirement age. And they are precisely the group of Americans--and a pretty big group at that--which depends desperately on Social Security benefits for the bulk of their retirement incomes.

Here's the preservationist logic against raising the retirement age:

1. Social Security benefits are pegged so that a person reaching what the agency calls its "full retirement age" (FRA) is entitled to his or her full benefit. People retiring at the earliest age, which is now 62, gets about 75 percent as much money each month from Social Security as if they waited until their FRA--66 for those now approaching retirement. It's also possible to defer taking Social Security until age 70, when the monthly benefit would be about 132 percent of what it is at age 66. This benefit structure was designed to be dollar-neutral to Social Security. Looking at longevity data and past decisions of beneficiaries, the agency figured that it will pay out the same amount of money regardless of when people elect to begin receiving benefits.

[Read: Medicare, Social Security Literally Extend Lives.]

Raising the retirement age from 66 to 70 means that the time gap between early retirement at 62 and full retirement has been increased from four to eight years. This assumes it would still be possible to take early retirement at age 62. If the agency keeps its benefit structure in place, it no longer can afford to pay a person 75 percent of their FRA benefit if they elect to begin receiving the benefit at age 62. Instead, that "value neutral" payment at age 62 will fall to about 57 percent of the full benefit. In dollar terms, a 62-year-old early retiree due $1,000 a month at his or her FRA would receive $800 a month if the FRA was 65, $700 a month if it was 67, and $565 a month if it was 70. These calculations were made by Nancy J. Altman, co-director of Social Security Works.

2. In theory, longevity gains mean that if the FRA was raised to 70, early retirement might begin at age 66, and not 62. Raising the retirement age would thus shift everyone by four years. The system would save money by having to pay benefits for four fewer years. But individuals would not be so bad off, because they'd have worked for an extra four years and presumably boosted their retirement incomes during that period of extra work. But while such longer lives are truly wonderful, they unfortunately are not being enjoyed by lower-income, less-educated people who work in physically taxing jobs. They're not living longer.

Wealthier and better-educated people, on balance, follow healthier lifestyles, seek out medical care, and follow their doctors' advice in taking medications and related therapies for health problems.

[See Are Second Terms Good for Stocks?]

3. Lower-income people often are not able to extend their working lives another four years. Many work in physically demanding jobs, and their bodies have worn out by the time they enter their 60s. People who retire at age 62 today tend to work in low-income, physically demanding jobs. For them, early retirement is not a luxury, but a forced necessity.

4. Raising the retirement age will thus sharply cut benefits of people who are still forced to seek early retirement. And these folks often have little set aside in the way of a retirement nest egg. Social Security benefits thus represent a very large percentage of their retirement incomes. Cutting those benefits, preservationists argue, is thus punitive as well as heartless.

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