Extending Social Security and Medicare Eligibility Ages-Becker

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.

Comments

[Craig West]

Both Judge Posner and Professor Becker are overlooking the fact that lower income individuals--those who probably need social security the most--have not seen an increase in life expectancy. Numerous other bloggers have pointed out this fact as a counterargument to raising the retirement age.

[Terry Bennett]

Back in 2000, I was struck by a line in the stump speech of the Communist candidate, Mr. Gore, referring with his trademark earnest passion to "the basic right to a comfortable retirement." What was he smoking? There is no such right. The thinking of the American mainstream has been polluted with delusions like this, to the point that fairness is no longer a value or a concern in our culture.

If you were the only person on earth, you could retire when you had produced enough to last you the rest of your life. Does the fact that I am also here with you mean that I am suddenly somehow responsible to make up the difference for your bad choices so you can spend the next 20 years trout fishing while I produce the sustenance for both of us? I assert that it does not.

FDR and LBJ offered the deals, and generations accepted and have relied upon them, and we cannot go back on our promises now that these people are too old to make adjustments. However, it is immoral as well as foolish for us to keep offering the same deal we now offer, and forcing the unborn to pay for it. I recommend we freeze the current system for those already in it or entering it soon, and institute a government-insured compassionate disability system for people 35 and younger, wherein you work until (a) you die, (b) you get rich enough not to work, or (c) you become unable to work, at which point the government will provide you a subsistence living IF you cannot provide for yourself. This will not only be easily affordable, it will put the responsibilities where they belong - first on the individual, and then on the collective.

[Neilehat]

Terry, "Communist"? What does such Red Baiting have too do with the Public Debate on Social Security and Medicare? I thought we had matured to the point that such alcohol induced hullcinations died with Joe McCarthy and other members of the House Committee on Un-American Activities. If American Domestic Policy is inspired by "Commies" then it must also be inspired by the likes of "Fascist Pig Dogs". Remember, "The true mark of a Civilization is the way it treats it's young and old". Not too mention, whether we like it or not, "We are our brother's keeper". Which is the Hallmark of a Christian Civilization. I presume that we still are one of them...

[Terry Bennett]

Neilehat,

Who says "Communist" is a dirty word? There are basically two ways of addressing the world: the "eat what you kill" approach (capitalism), or we can throw everything in a pot and let everybody eat from it (communism). All modern political systems are hybrids of both, and each has something to recommend it. Al Gore's positions lean heavily away from capitalism and toward communism; it's just who he is, and I think he should own it but once he does, it's by no means an insult to call him what he is, even though I disagree with him.

It seems I also disagree with you. I don't doubt that somebody once said that the true mark of a civilization is the way it treats its young and old, but I reserve the right to disagree with that person and that sentiment. Perhaps I do agree, but disagree with the judgment that Medicare and Social Security constitute treating the old well. We are certainly not treating the young well, putting them in hock up to their eyeballs before they're even born.

Finally, I do not see where Cain's rhetorical query to God was given a definitive answer in the text of Genesis. We may or may not be our brother's keeper. Besides, I'm a WASH (white Anglo-Saxon Hindu).

[Neilehat]

Terry, a WASP Hindu eh? Ever been to the back alleys of Calcutta or Bangalore? As for myself, I'll continue to adhere to my Christian Ethics and the Ten Commandments.

[Sequel]

Two thoughts on this very provocative column.

First, as others have noted, life-expectancy has not changed equally for the various groups collecting SS. So, your proposal's attempt at basic fairness requires that it be based on a different number. (Parenthetically, there is some room for doubt that an individual's life expectancy itself has changed all that much, as opposed to improvements in public record keeping that determines a collective life expectancy.) In addition, until fairly recently, most social security recipients had not worked, hence contributed, for their entire working lives, and were paid by a different maximum benefit computation than the one used today. So the premise that we are currently overpaying retirees demands some complex documentation -- probably from the GAO.

Second, if SS' initial intent was to encourage older workers to move outside the workforce, and if the program is doing that even now, then the numbers in #1 above are absolutely critical to establishing the need to move the average retirement age up by 4 years. In reality the number may not be 4, but 6, or 1, or -1.

The missing element in your proposal, tho, is whether the goal is to simply keep SS solvent in the long term or to roll it back. In your last line, you deny both outcomes. So, I'm not sure what it is that you are advocating, and have insufficient numbers to evaluate whether your proposal is a reasonable way to achieve any outcome at all.