As I indicated in my recent blog post: The Times They Are A-Changin', I am going to be exploring potential ways to improve the financial and environmental sustainability of the United States by addressing climate change and the national debt. As the first portion of this series, I am going to explore the idea of creating an automatically adjustable retirement age for collecting social security retirement benefits.
According to the government's social security website, Americans only have to work 10 years in their life to receive social security. Also, for people born before 1960 the full retirement age is 66 (plus some odd months depending on the exact birth year), and for people born in 1960 or later the full retirement age is 67. The original retirement age for social security benefits was 65 as documented in the text of the Social Security Act of 1935. This means that since it's inception the social security retirement age has only increased two years.
To put this meager adjustment in retirement age into perspective, please consider that US life expectancy in the 1930s was 58 for men and 62 for women and the retirement age was 65. This means that when social security was designed the expectation was that the majority of Americans would not live long enough to collect their benefits. Compare this to today. The retirement age is 67 and the average life expectancy in the US is at least 78 according to the World Bank. This means that while the retirement age has increased 2 years over the past 80 years, life expectancy has increased by about 18 years.
A social security retirement benefits program that lacks automatic adjustments in the retirement age based on life expectancy is inherently unsustainable. Even without the additional stresses on the program presented by fluctuations in population throughout time (e.g. the baby boom generation reaching retirement age), social security will always be hard pressed to remain funded as individuals attempt to spend larger percentages of their lives in retirement.
I propose that implementing an automatic adjustment of the retirement age based on life expectancy may allow the social security retirement benefits program to remain viable indefinitely. I suggest a '3 year plan' for social security. This '3 year plan' would entail automatically adjusting the retirement age to be 3 years less than a retiree's life expectancy. This plan would not be as austere as the original draft of the Social Security Act, but it would be a significant improvement over today's model!
The chart below represents the retirement age and the time an average adult could expect to receive retirement benefits as a percentage of the time they spent working during their lifetime with the blue and orange columns representing the '3 year plan' and the current state of social security benefits respectively. As you can see the '3 year plan' would hold steady the retirement percentage around 5%.
For Americans born in the early 1900's, the percentage was less than 6%. By the time Americans born in the 1960's retire the percentage will be nearly 25%. Hypothetically, if social security were to survive into the 2070's (by the time the children born last decade reach the current retirement age) the percentage will have climbed to nearly 36%!
While it would be unwieldy to attempt to adjust the retirement age every year, I suggest that it would be possible to adjust the retirement age decade by decade during census years. Of course, it would be unpractical and unfair to adjust the retirement age immediately prior to a person's expected retirement. Instead, I recommend having the 'determination decade' (the decade in which a generation's retirement age is determined) be the decade during which they turn 50, which would allow individuals twenty years or more to plan for retirement.
The chart above estimates roughly what the retirement age would be (or would have been) for everyone born since 1900. To take myself for example, I was born in the 1980's. This means that my retirement age would be determined in the year 2030. Based on current projections, it is likely that the US life expectancy will be 81 at this time. As a result my retirement age would be 78 under the '3 year plan'.
Through the lens of today's outdated retirement age, a retirement age of 78 seems outlandish; however, at this point I can only expect that social security benefits will cease to exist by the time I turn 60. Without correction it is expected that social security will be bankrupt during the 2030's after it starts paying out more than it is taking in annually starting in 2017. With the '3 year plan' for social security, there is little reason to suspect that social security would go bankrupt as long as the US government exists.
Obviously, it would be politically impossible to take away benefits of current and soon-to-be retirees. Thus, I would advocate starting with people born in the 1960's. Even though the '3 year plan' would push back the retirement age of my parent's generation by about 8 years (to age 75), the alternative is for social security to run out of money prior to the end of their life expectancy! Furthermore, any half-measures (perhaps a '6 year plan') for Americans born in the 1950's would help to alleviate the strain on the national debt that will begin to pile on starting in the latter half of this decade.
While this is a politically complex issue, I would suggest that fixing the social security funding problem is as simple as adjusting the retirement age. I know that there must be many ways in which I am incorrect about this issue. Please tell me how!
Thanks,
Sean Diamond
Hi Sean,
ReplyDeleteInteresting ideas. One thing that this model does not appear to consider is that the ability of people to work/support themselves in old age might not be so closely correlated to the average life expectancy as time goes by. So whereas people had an average life expectancy of 58 for men in the 1930s and retirement age of 65, it might be that most men were not as 'incapable' of working until retirement age as they might be for later generations. To put it another way, just because the average life expectancy has increased, does not mean that people's capability to work/support themselves has stretched out likewise. I hope I'm not talking complete gibberish. Great blog post, as always :)