During the height of the Great Depression in 1935, with unemployment rates around 20%, the US introduced a social security system that made taxpayer-funded income available to workers if they retired at age 65 or older. This was combined with a tax on the earnings of employed persons that was supposed to finance the incomes to retirees. The purpose of the system was partly to get older workers out of the labor force so that more of the then scarce jobs would become available to younger workers.
At the beginning, this system was not expensive since retirement payments were not generous, life expectancy at age 65 was then around 12 years, and coverage of the working population was quite limited. All this greatly changed during subsequent decades. Social security retirement incomes have risen greatly, partly due to highly generous adjustments for increases in the cost of living. In addition, the average person who retires at age 65 now lives for about 19 years, because life expectancy after age 65 has increased greatly.
An even larger source of the increased cost to taxpayers of benefits provided to older persons is the introduction of Medicare in 1965 that provides expensive medical care for men and women over age 65. Social security retirement income and Medicare-financed health care have become a major part of spending: they are about 8% of GDP and 1/3rd of the federal budget. These shares will rise greatly during the next couple of decades unless major reforms are introduced into these programs.
One obvious reform would be to raise the age of eligibility for both social security income and Medicare benefits. It is surprising that while life expectancy of older persons has been growing rather rapidly for the past several decades, and jobs have become less physically demanding, actual retirement ages have declined from the 1930s. The average age of retirement is now under 65 (about age 64) because a significant fraction of men and women take retirement at age 62 when workers first become eligible to receive social security retirement benefits.
In light of the increase in life expectancy after age 65 and the decline in physically demanding jobs, it would be reasonable for the eligibility age for social security to rise to 68 or 70. The average age of retirement from the labor force for Japanese males is already only a little below 70, which shows that much higher retirement ages is feasible. Persons who are physically or mentally incapable of working would then opt for disability status. This is a rapidly growing category in most developed countries, despite the increase in physical and mental health of older persons, because of a weakening of qualifying standards. With more flexible labor markets for the elderly, such as reducing the fear of companies that they will be sued for discrimination against older workers, older men and women could retire from more demanding jobs, and take jobs that are less taxing. This is what happens to older men in Japan.
An increase in the average retirement age from 64 to 68 would save about 20 percent in social security payments since the average number of years in retirement would be cut by about 20%. Similarly, an increase in retirement age to 70 would save about 25 percent in social security retirement benefits. Either change would also add significantly to revenue from social security taxes since workers would be employed for several additional years. Therefore, such increases in age of eligibility for social security benefits would go a long way toward solving the looming social security financial “crisis”.
Once a later age of retirement was introduced, it would be much easier to raise the age of eligibility for Medicare benefits. The great majority of older workers would be covered by their employers’ health insurance plans, and would continue to receive the health benefits provided by these plans. Coverage of workers in their later 60s would add to the cost of company plans, but not by extraordinary amounts since medical spending by the average person between 65-70 (in good part under Medicare) is only a little more than 10% greater than that of persons aged 60-65. Moreover, spending on health care by older persons is lower under private plans than under Medicare because the greater deductions and co-pays in private plans induce individuals to economize more on their medical spending.
The savings in public health care spending from a higher age of of eligibility for Medicare and social security benefits would not be as large a fraction of Medicare spending as of spending on social security since per capita spending on medical care gets much larger as people get into their 70s and 80s. Still, it would make a sizable dent in Medicare spending.
Higher ages of eligibility for social security and Medicare benefits alone would not solve the looming entitlement budgetary crisis. However, they would make big contributions toward the solution without requiring radical changes in the level of benefits received by eligible persons.