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A Hard Look at Raising the Retirement Age

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What You Need to Know

  • A report from the American Academy of Actuaries looks at the benefits of raising the Social Security claiming age.
  • Longer life expectancies and a declining ratio of workers to retirees is putting stress on the system.
  • Yet there are socioeconomic imbalances that make changing the system problematic, Marcia Mantel and other experts point out.

When coming up with solutions for Social Security funding, one topic always arises: raising the retirement age. Of course, full retirement age for Social Security benefits was raised in 1983, from 65 to 67, depending on birth year. Other ideas include increasing the age of Social Security benefit eligibility from 62 and allowing retirees to delay claims beyond age 70.

The American Academy of Actuaries has released a new paper exploring the efficacy of these ideas. It looks at the impact of raising the “normal retirement age” (or full retirement age), or the age “at which unreduced Social Security benefits are paid.”

As the paper notes, “the Academy’s Social Security Committee believes that raising the retirement age is likely to be one of the key elements in any legislation enacted to restore Social Security’s long-term financial health.”

Retirement experts agreed that this change would shore up the system. But they pointed out that such an increase would hit workers in certain occupations particularly hard — and that Medicare premiums needed to be part of the conversation.

Living Longer

According to Old Age, Survivors, and Disability Insurance data, in 1970, the average male at 65 had a life expectancy of 13.1 years, and a female of 17.1 years. In 2019, male life expectancy at 65 grew to 18.1 years, and females to 20.7 years. It continues to increase.

The 2021 Social Security Trustees Report noted that the old-age trust fund was on track to run out of money by 2033. At that point, benefits would be cut by roughly 25%. Many options to take some stress off the system, like increasing payroll taxes, have been discussed.

Meanwhile, workers have been retiring, or at least claiming benefits, later.

According to the report, “the average age at benefit commencement has increased by over a year since 2005, the percentage of workers collecting benefits at the earlier age has dropped by almost half, and the percentage collecting benefits after normal retirement age has roughly tripled.”

For example, in 1995, while 52% were electing benefits at age 62, only 5% were electing them after normal retirement age, or NRA. In 2019, however, 27% elected benefits at age 62, while 16% claimed them after NRA.

The trend toward retiring later was attributed to several factors, according to the paper, including:

  • Increased healthy life expectancies.
  • Increased education levels and a shift toward less physically demanding jobs.
  • A shift away from employer pension plans.
  • Concerns about sufficiency of retirement assets due to market downturns.
  • Increasing health care costs.

Of course, as the paper notes, Social Security’s program design incentivizes delayed claiming, including increases in NRA and the raise to 8% for the delayed retirement credit.

But a glaring problem exists: In 2010, there were 4.6 Americans of prime working age, 20 to 64, for each person 65 and older, or retirement age. In 2020, that ratio dropped to 3.5, and in 2060, it will drop to 2.5.

As the report states: “The relatively smaller base of remaining workers will struggle to produce enough to fund an increasing benefit financing burden while maintaining anything like past rates of improvement in living standards.”

And while there may be a push to keep people working, employers may perceive older workers as less flexible, especially in adapting to changing technology.

3 Options for Raising the Retirement Age

The academy offers these suggestions on how to raise the Social Security NRA:

  1. Scheduled increases in NRA: This is how the retirement age is being raised now: gradually. By increasing NRA by three months per year until it reaches 69 or 70, this could reduce the long-range deficit by roughly 30%, according to the academy.
  2. Fixed ratio of working to retirement years: This would tie increases in the NRA to longevity expectations. For example, according to the group, the NRA could be indexed to maintain a constant ratio of expected work years, such as age 22 to NRA, to benefit years (life expectancy from NRA) so it would mean an NRA increase of about one month for every two years.
  3. NRA increases as needed to maintain actuarial balance: If Social Security is “restored to actuarial balance,” the report states, it could be maintained through an automatic adjustment, such as done in several other countries such as Germany, Japan and Canada.

There is also the potential of raising the early eligibility age beyond 62. Or, if the NRA were raised to 70, that would give three more years of reduced benefits.

A Viable, but Regressive, Option

“Raising the full retirement age is a viable option,” Wade Pfau, professor at The American College of Financial Services and author of the “Retirement Planning Guidebook,” wrote in an email to ThinkAdvisor.

“It does have the disadvantage in that it is a regressive reform from the perspective of income equality. Those with lower lifetime earnings tend to have jobs that require more physical labor that makes it harder to delay retirement and would therefore experience a bigger reduction to their benefit if needed to claim early. But the reform generally makes sense to account for improved longevity in society.”

Agreeing that raising the full retirement age is a good approach to improve the funded status of the Social Security system, David Blanchett, managing director and head of retirement research at PGIM DC Solutions, said in an email to ThinkAdvisor, “I’m generally a fan of a multi-pronged approach to improving the longevity of the system, through, for example, some combination of increasing claiming ages, potentially reducing benefits (for workers with higher incomes or savings), increased taxation of benefits (again, targeted towards higher income retirees, etc.).”

He added that while he sees Social Security’s primary purpose as “providing a minimum living base to benefit to Americans during retirement,” the longevity issue comes into play, especially when dealing with socioeconomic issues, i.e., the wealthier are living longer. “Not only are higher income individuals likely to receive benefits for longer, but they are also more likely to have the means to delay claiming benefits (i.e. be less affected by any kind of increase in claiming ages).”

4 Major Concerns

Retirement specialist Marcia Mantell, founder and president of Mantell Retirement Consulting Inc., concurred, noting that “it may be just fine to raise the retirement age to 70 when you have a desk job and have the luxury of sitting all day. But there is no way the vast majority of folks in the service industry, high-danger jobs and physical labor jobs can get to 60 today, let alone 70 in the future.”

Her four big concerns with increasing the age level are:

  1. There’s no way people who will need to retire early will be able to afford to do so. Today’s 30% reduction claiming at 62 would increase to 45% if the FRA went to 70.
  2. There was little discussion in the report about how lower benefits and increased Medicare Part B premiums would affect retirees.
  3. Older people would have to keep working, and as the report states, employers may not want this, especially as “young folks always cost less. So the premise of this article is flawed unless employers get on board.”
  4. If these changes are made “we have to turn the battleship around” on how workers understand Social Security. They will definitely have to save more, she says.

Mantell added that Social Security statements need to be more realistic, showing earnings limits before FRA as well as how Medicare Part B is pulled from monthly benefit amounts.

In addition, she said, employers will have to revamp their 401(k)s and 403(b)s to start at 10% deferrals “as the mandatory default deferral rate, no opt-out.”

She said that “if we are fundamentally shifting the full responsibility of retirement income to real people, employers are going to have to pony up and help their workers become owners of their retirement.”