In December, President Obama’s fiscal responsibility commission will recommend ways to fix long-term federal budget shortfalls, very likely including changes to Social Security. At that time, Congress should consider a reform that could increase retirement incomes while boosting the economy and federal tax revenues: gradually raising Social Security’s early retirement age of 62.
When Social Security was created in the 1930s, retirees could not start collecting benefits until age 65. But in 1956, eligibility rules were changed to allow women to begin collecting at age 62. In 1961, the rule was changed for men as well. Today, 62 is the most common age of retirement. With a typical 62-year-old likely to live to age 83, an individual now spends roughly one-third of his adult life in retirement.
For those who have saved enough, this is perfectly fine. But many people claim Social Security benefits at 62 without considering that doing so reduces monthly benefits by about 25 percent for life. Without early retirement, poverty among retirees over the age of 65 would be about one-fifth lower.
Restoring the early retirement age to 65 would have little effect on Social Security’s solvency, because benefits increase when retirement is delayed. The trust fund’s solvency would be extended for only a few years, meaning that other steps would be necessary to preserve it.
But raising the early retirement age would prevent lower benefits due to early retirement, raising average monthly checks significantly. Private pension benefits also would be higher — by about 15 percent — because retirees would have been paying in for longer and have fewer retirement years to finance.
Increasing the retirement age also would help the economy and the federal budget. The nation’s annual GDP would increase by hundreds of billions of dollars. Those extra dollars would be taxed, resulting in higher tax revenues to fund the federal budget.
One impediment frequently cited to Americans working longer is the shortage of jobs. Certainly unemployment is high at the moment, which is why any increase in the early retirement age should be phased in over time. But with 10,000 baby boomers leaving the workforce each day, businesses will need more employees as the economy recovers. And more affluent retirees are likely to spend more, which will in turn create jobs.
The Social Security payroll tax should be reduced or eliminated for individuals over age 62, giving older Americans the incentive to work and employers the incentive to hire them. To protect individuals who cannot work longer, Social Security disability benefits should remain available and the eligibility age for Supplemental Security Income — a means-tested benefit for the poor — should be lowered from 65 to 62. Finally, Medicare should be made the primary payer of health costs for individuals over age 65, which would significantly lower employers’ health insurance costs for older workers.
Andrew G. Biggs is a resident scholar at the American Enterprise Institute in Washington. He wrote this for the Los Angeles Times.
