Among the potential solutions for addressing Social Security’s well-publicized funding woes is raising the full retirement age — which stands at 67 — to reflect Americans' greater longevity compared with average lifespans when reforms were enacted in the 1980s.
Some experts and policymakers like the strategy, with straightforward proposals to raise the FRA to 69 or even 70 over a number of years. Doing so could fill a big portion of the program's funding shortfall by pushing back the age at which Americans become entitled to full benefits.
But, as explored in a recent paper published by retirement researchers Andrew Biggs and John Shoven in collaboration with the Stanford Institute for Economic Policy Research, this approach also has some big downsides.
As the rich have increased their lifespans by giving up smoking and embracing healthier lifestyles, Biggs and Shoven report, longevity has barely budged for the lowest-income Americans. Raising the retirement age alone, then, would have a disproportionately adverse effect on the very group that depends on Social Security for protection against extreme poverty in retirement.
However, Biggs and Shoven argue, it is possible to raise the Social Security retirement age while sparing those whose lifespans aren’t increasing. This can be accomplished by pairing a two- or three-year increase in the FRA with tweaks to the benefit formula to boost the benefits received by lower-earning beneficiaries.
Adopting this approach, Biggs and Shoven find, could help to fill roughly half of Social Security’s funding shortfall while preserving the lifetime value of benefits flowing to low-income retirees. The cost of doing so is also substantial, they warn, as the average high earner would see benefits reduced by as much as 26%.
Ultimately, it’s up to the public and policymakers to decide on the best path forward, Biggs and Shoven agree, but it’s important for all stakeholders to understand how specific reforms will affect different populations of workers and retirees.
Nuanced Approach
Using figures from 2024, the report recounts that Social Security’s benefit formula replaces 90% of the first $926 in average indexed monthly earnings, 32% of monthly earnings between $926 and $5,583, and 15% of earnings between $5,583 and the roughly $14,050 maximum taxed by Social Security.
Benefits also depend upon the age of benefit claiming, the authors point out. For each year a person claims before the full retirement age, benefits are reduced by about 6.7%. As such, if the full retirement age were increased by two years effective immediately, every retiree’s benefits would be cut by around 13.3%.
“However, by adjusting the replacement percentages in Social Security’s benefit formula, an increase in the full retirement age can be coupled with offsetting benefit increases to hold harmless low-earning Americans,” the paper notes.
Biggs and Shoven illustrate this using a policy under which the full retirement age would again be increased by two years, from 67 to 69. At the same time, though, Social Security’s first replacement percentage would be increased from 90% to 106%, the middle factor reduced from 32% to 28%, and the top factor cut from 15% to 7%.
“Using this formula, very low-wage workers with average earnings about 25% of the national average would receive the same benefit they are entitled to under the current benefit formula,” the paper explains. “Middle-income workers would receive benefits 13.3% below the current benefit formula, equivalent to a two-year increase in the normal retirement age.”
Workers earning the maximum taxable wage would receive benefits some 26.7% below the current formula. This is a sizable cut, the authors note, but one that would likely be “absorbable” without causing substantial financial hardship. In the long term, Biggs and Shoven find, this policy would address about half of Social Security’s annual funding shortfall.
“Their benefit would be reduced by approximately 13.3% via the two-year increase in the full retirement age and an additional 13.3% by reducing the benefit formula’s 15% replacement factor to 7%,” the authors observe.
Acceptable Outcome?
While promising, Biggs and Shoven suggest, this progressive increase in the Social Security retirement age is not a magic bullet for the program’s solvency, for three reasons.
“First, increasing Social Security’s retirement age would reasonably require a decade or more of prior notice,” they suggest. “For instance, in 1983 Congress legislated an increase in Social Security’s full retirement age from 65 to 67, but that increase did not begin until the year 2000 and was not completed until 2023.”
Second, any increase in the Social Security retirement age would affect only new beneficiaries; benefits for current retirees would be unaffected. Taken together, Biggs and Shoven find, the full savings to Social Security would not occur for about three decades.
Finally, even once fully implemented and phased in around 2065, this provision would reduce total retirement benefit outlays by roughly 14.9%. As noted, this is enough to fill about half of Social Security’s annual funding gap, but other reforms would also be needed. That could potentially complicate public acceptance of a higher FRA tied to a more progressive benefit formula.
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