Thursday, July 31, 2008

Academy of actuaries: Raise the retirement age

On Monday the Academy of Actuaries will hold a press conference at the National Press Club to release a new paper on Social Security reform. The sneak preview, via the Associated Press's Jesse J. Holland, is that the actuaries favor raising the retirement age as part of a larger Social Security deal.

Want to keep Social Security from going bankrupt? Make future recipients wait longer for their first benefit check because they probably will live longer anyway, an influential group of actuaries says.

The next president and a new Congress will come under increasing pressure to act to fix the Social Security system. Democratic presidential candidate Barack Obama rejects any increase in the retirement age while his GOP rival John McCain opposes tax increases as a possible fix.

The American Academy of Actuaries, which advises policymakers on risk and financial security issues, wants any potential solution the White House and lawmakers might consider to include raising the retirement age from the current range of 65-to-67-years-old. The group provided The Associated Press with an advance look Thursday of its recommendations.

Current benefits are supplied by payroll taxes from today's workers, all of whom pay a 6.2 percent Social Security payroll tax on income up to $102,000. Their employers match it, for a total tax of 12.4 percent. The tax applies only to earned income, not to passive income such as dividends and interest.

Benefits are projected to exceed the Social Security system's tax revenues in about nine years. The program's trustees have said the Social Security trust fund will be depleted by 2041 without changes.

A major problem, the actuaries say, is that people are living longer. That means they are drawing more money from the program.

When Social Security started in 1935, the average American's life expectancy was just under 60 years, according to the Social Security Administration. By comparison, people now eligible for Social Security can expect to live on average a little past 76, the agency says, "meaning workers have more time for retirement and more time to collect Social Security."

For many years, 65 has been the retirement age to receive full benefits. But under changes in 1983, only people born before Jan. 2, 1938, can collect full benefits at 65. Those born after that date face a gradually rising retirement age for full benefits until it reaches 67.

Current estimates show that by 2040, 65-year-old men and women could live at least 18 more years after becoming eligible for full Social Security benefits.

"You just can't have people living longer and longer and longer, and have the program with a frozen normal retirement age of 67. It just doesn't make sense," said Bruce Schobel, the chairman of an academy task force on retirement security principles. "Eventually people will have a larger and larger proportion of their lives spent in retirement until you reach the point where we just can't afford it."

The academy is not staking out a position on when people should retire and acknowledges that saving Social Security will take more than just raising the retirement age.

"All that we're suggesting is that some increase in the retirement age should be part of any package," Schobel said.

Obama already has rejected such advice. "We will not raise the retirement age," Obama said in June at a campaign event in North Carolina.

Obama has, however, called for a Social Security payroll tax on incomes above $250,000 a year, compared with the current $102,000 threshold.

"Barack Obama is opposed to raising the retirement age. He believes we should strengthen Social Security while protecting the middle-class families that rely on it," said Jason Furman, Obama's campaign economic policy director. "To that end, he would like to work with Congress on a plan to ensure that people making over $250,000 pay a little more to strengthen this vital program for generations to come."

McCain originally said everything was on the table to fix Social Security. He recently has amended that position, saying he would not increase payroll taxes. "I want to look you in the eye: I will not raise taxes or support a tax increase," he told supporters Wednesday.

Former Texas Sen. Phil Gramm, who served as a McCain adviser until he resigned earlier this month, told The Washington Times this month that a bipartisan deal to save Social Security might include raising the retirement age to 70 over 30 years.

Sens. McCain and Obama are both in a bit of a fix here, although Obama worse than McCain. McCain can reject tax increases and still more or less fix Social Security, say through a combination of raising the retirement age and progressive benefit reductions for high earning retirees. (If you let the NRA rise to 70 by 2080 or so, you could do a benefit reduction that shielded the bottom half the earnings distribution from cuts.) The prospects for political success may be limited, but he can at least put together a plan that's plausible as policy.

Obama's in a bit deeper: his plan to hit earners making over $250,000 would fix maybe 15 percent of the long-term deficit, and he's rejected raising the retirement age or cutting benefits. Where does the other 85 percent (much less the additional fixes needed to make the system sustainable beyond 75 years ) come from? If someone has an idea how they plan on making this work, please let me know.

Update: Reader AK questioned whether raising the retirement age would be regressive, given the shorter life expectancies of low earners. The Excel file below shows that raising the normal retirement age wouldn't be regressive, since it would reduce everyone's benefits by the same amount. Raising the early eligibility age -- 62 -- would be regressive and cause larger percentage cuts for low earners.


Anonymous said...

Why do people keep citing the misleading statistic of average life expectancy changing from 60 (1935) to 76 now? Better statistics are life expectancy once reaching working age (and thus contributing into the system) - or even better - life expectancy once reaching retirement. While both have increased, neither is nearly as much as the statistic usually cited. Infant mortality rates have improved dramatically since 1935, which have greatly contributed to the overall increase in life expectancy...

Andrew G. Biggs said...

Very good point, and it will be surprising if the actuaries report itself focuses on that number since they'd know better. The reason it's used is probably just that it's an easier statistic to find and understand, though you're definitely right that life expectancy as of working age or (maybe better) as of retirement age is the most important statistic. Plus it's a pretty big change, which catches the eye more than the other more relevant figures. Life expectancy as of age 65 can be found at the Trustees Report site here: Thanks,


Arne said...

I am for raising the retirement age, but I am seriously disturbed by your math. A man retiring at 65 today has a 17.6 year life expectancy. In 2080 it will be up by 2.9 years (IC projection). How can you justify raising the NRA by 5 years? You will have shortened that person's retirement by 2.1 even though requiring him to contribute for 5 more years. Even compared to the 1960 cohort (which makes sense if you assert this years retirees would have had their NRA raised, but 1983 was too late to do it), would have the 2080 cohort working 3 years longer and having a 0.3 year shorter retirement.

On top of what I see as unfair, I see it as too uncertain. The LC projection for life expectancy shows only a 1.6 year (compared to 2.9 year for IC) increase betweeen 2008 and 2080. I believe IC justifies a 1 year increase between now and 2080, but LC does not justify even that. We can and should wait about 2030 before deciding whether and when to increase the NRA.

Jim Glass said...

Everybody has their own "fix" for Social Security. I'd for once like to see some group come out and specify the problems to be fixed first. Then relate its fix to those problems.

There are a bunch of problems, e.g.:

* Long term actuarial balance.
* Cash flow problems in the 2020s, when cash needed for the trust fund on top of all that for Medicare, Medicaid, etc., is very likley to cause program re-writes that make today's long-term actuarial projections (and fixes) irrelevant.
* The economic loss forced on the young by the $17t "backward transfer", that protends loss of future political support for SS.
* Spreading that loss to the young (inevitable as it is) equitably among generations.
* The decline in the "progressive social insurance" nature of SS due to the just-above points.

I'm not against delaying the retirement age per se, but on its face it does little to help the 2020s cash flow problem ... makes the loss to the young worse from today's point of view (though it has to get worse some way or another) ... does nothing about spreading the loss equitably ... and is regressive in that it is more costly to the poor and unable-to-work in terms of their welfare than to the rich and healthy.

The only thing that delaying the retirement age seems to solidly address is long-term actuarial balance ... which I guess is what actuaries would naturally be concerned about.

But in my opinion of however little worth, long-term actuarial balance is probably the least of SS's problems -- and getting the program politically through the 2020s and early 2030s in face of all the other problems, especially the cash-flow one, is the major one.

One-note fixes to SS always remind me of back some years ago when whatever was wrong with the economy everyone told Greenspan "Cut interest rates! Cut interest rates!" But what exactly is the problem being addressed? "Cut interest rates!" Or more recently among Republicans, "Cut taxes! Cut taxes!"

And the one-note fix always seems fixated on long-term actuarial balance, which as I said, IMHO ...

Paul Lawin said...

It will be interesting to see how strong the AAA statement is. So far they've done a pretty good job of "just the facts", without advocating any one solution.

I suppose they could be saying that the very long term projections are always going to be bad unless we index the NRA to longevity. So that's got to be part of the solution.

Andrew G. Biggs said...


You could index the retirement age to actual changes in longevity, so it won't rise too much if life expectancies don't increase so fast.

Regarding whether it's fair, as strange as it sounds, in one sense fairness isn't really the issue. The future Social Security shortfall is a function of over-generosity to past participants and unfavorable demographic projections going forward - this simply creates a deficit that has to be dealt with somehow. Fairness comes in when we ask how addressing the shortfall should be divided between rich and poor, and between people today and people in the future.

Raising the retirement age to at least match longevity is clearly fair, since otherwise future retirees will get a better deal than today's will. But whether we should raise it beyond that level depends on how we want to divvy up the pain between current and future cohorts.

Bruce Webb said...

Jim Glass could you clarify some of your comments? For example when I look at the following table I just don't see any major "cash flow problem in the 2020s". Table VI.F7.—Operations of the Combined OASI and DI Trust Funds, in Constant 2008 Dollars, Calendar Years 2008-85 [In billions]. Instead I see a gap in 2025 of about $170 billion in 2008 dollars or not much more than the cost of the current stimulus package. The notion that a similar borrowing need in 2025 will bring the bond market to its knees could use some explication.

Plus I am a little confused about the "$17 t "backward transfer"". First I have no idea where the $17 trillion figure comes from. Oops full stop.

I now see that the $17.4 trillion comes from Table IV.B7. But the methodology seems odd.
"The first line of table IV.B7 shows that the present value of future cost less future taxes over the next 100 years for all current participants equals $17.4 trillion. For this purpose, current participants are defined as individuals who attain age 15 or older in 2008."
What? Why 100 years rather than the standard 75 years or alternately Infinite Future? Using the former we would be capturing all "current participants" whose life expectancies are 90 years or less which is to say almost everyone. But that would give us a PV of future cost over future tax of $6.5 trillion which if reduced by the 2007 year end value of the TF would give us a total unfunded liability of $4.3 trillion (per Table IV.B4). On the other hand if we extended this to Infinite Future we end up with PV of future cost over future tax of $15.8 trillion which reduced by the current TF balance gives a unfunded liability of $13.6 trillion. Instead we seem to have an arbitrary figure of 100 years which manages to tack $10.9 trillion in excess costs during the period 2083 to 2108. No 'current participant' as defined will be contributing taxes in that period and the youngest person drawing benefits at its inception will be 90 years old. To call this a 'backward transfer' is kind of bizaare. It is fair to say that no current beneficiary will be drawing a check in 2083 (62 plus 75 = 137). As for current contributers the youngest Boomer will be 119 in that year (2083-1964), the youngest Gen-X 101 (2083-1982). Sticking us for a near $11 trillion extra tab that doesn't start coming due for 75 years seems kind of a stretch.

And Andrew seems to share this with his "over-generorisity to past participants". Given that the Trust Funds never actually went to zero and are sitting at $2.3 trillion today clearly there was no over-generosity for those past participants who are now deceased, they paid their way and then some. And considering that SS income and the principal in the TF are currently scheduled to fund full benefits until 2041 it is hard to blame any current beneficiaries, the youngest (early retirement in 2008 at age 62) of them will be 100 in 2041.

So I am not buying into the premise. Plus I find it interesting that per Table IV.B7 the PV of cost less taxes for all future participants is actually a negative $1.5 trillion. Making it look like $17.4 trillion was simply picked as representing the scariest number possible. I'll accept some responsibility for the $6.5 trillion gap between projected future cost over future income between now and 2082 (but I do want credit for the $2.3 trillion in the Trust Funds). And this even though I don't expect to be around after 2041. But I simply see no reason to accept any responsibility for contingent outcomes over the period 2082 to 2108.

Bruce Webb said...

I just put up some excerpts from Jim and Andrew's comments along with my reply as a new post on AB. $17 trillion backward transfer

Just a heads up in case either of you would like to leave a response in comments over there.

Anonymous said...


"raising the retirement age is clearly fair, because otherwise future retireees will get a better deal than today's"

easy for someone with an easy job that he likes to say.

on the other hand you could explain to people that raising their payroll tax 2% while their incomes are going up from 40% to 230% would enable them to retire at age 65 if they wanted to (or 62 on a reduced pension) having paid for their retirement with their own contributions.

as for "fairness" here all this time i thought you were worried that future retirees would get a worse deal than ida fuller.

maybe we could spend some time talking about just exactly what "fairness" means across generations.

i think that future generations may have to pay more for gas than i did in 1950. That's clearly unfair. Maybe we should set up a fund to help them out.

Jim Glass said...

Bruce, regarding your disbelief of the existence of the "backward transfer" -- past retirees taking a good deal more out of the system than they put in, with future workers paying the difference:

If you wish not to believe the words of our host when he answered you regarding this previously...

"Bruce, I think you're not right regarding the backward funding (meaning net transfers to early cohorts), and the table you cite tracking trust fund balances wouldn't really give a yes/no answer in any case.

"If you look at this table you'll see that past/present participants have received $17.4 trillion more in benefits than they paid in taxes"

Nor of the Treasury [.pdf] (earlier year data)...

"The fundamental reason Social Security must be reformed is that the benefits promised to the public have a present value that is $13.6 trillion greater than the present value of the revenues that the system is projected to receive....

"Why must the system increase net receipts by $13.6 trillion if it is already requiring current and future workers to pay in more than they will receive? The answer relates to the system’s generosity to early birth cohorts — generations of workers now either retired or deceased. Social Security paid these previous cohorts benefits that exceeded their lifetime contributions by more than $13.6 trillion."

Nor of the Trustees...

"... Subtracting the current value of the trust fund (the accumulated value of past OASDI taxes less cost) gives a closed group (excluding all future participants) unfunded obligation of $15.2 trillion. This value represents the shortfall of lifetime contributions for all past and current participants relative to the lifetime costs associated with their generations."

Nor of Paul Krugman...

"Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme.

"In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in.

"Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today's young may well get less than they put in)."

Nor of Paul Samuelson, written back in those happy Ponzi scheme days....

" The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in -- exceed his payments by more than ten times...!

"How is it possible? It stems from the fact that the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see...

"Social Security is squarely based on what has been called the eight wonder of the world -- compound interest. A growing nation is the greatest Ponzi game ever contrived."

Nor of ... well, that's enough. Hey, that's fine. It's a free country. You can not believe what you wish.

That's certainly one way to deny "The fundamental reason why Social Security must be reformed".

Bruce Webb said...

Jim you have confused the technical term 'current participant' with 'current and past beneficiaries'. Of the $17.4 trillion you cite $6.6 represents 'unfunded scheduled benefits payable from 2041 to 2082, the other $10.8 benefits payable from 2083 to 2108. Reread the definition of 'current participant' and ponder the implication of 'future cost'. To equate future costs with past expenditures seems to not pass the numeric test.

Bruce Webb said...

Jim if you reexamine the Trustees' definition of 'future participant' you will see it excludes everyone between the ages of 15 and 66. On the other hand the $17.4 trillion includes all benefits payable over a 100 year period. In 2108 eligible beneficiaries will include all wage workers born between 1994 and 2041, workers who by definition are not 'current participants'. This time shift undercuts your argument that all of that $17 trillion is a 'backwards shift' to past and current beneficiaries.

The notion that past beneficiaries got a better deal than future ones is to turn reality on its head.

Bruce Webb said...

Oops got that wrong. Current participant excludes everyone with birthdates after 1994 and so everyone who will be 67 by 2018 which is to say any one with birthdates between 1994 and 2041.

But the basic argument stands. A very large part of that $17.4 trillion is payable to people who are not even born today to say nothing of collecting benefits

Bruce Webb said...

Got THAT wrong.

Try 2008 for 2018.

Damn iPhone blogging.

Bruce Webb said...

Back at home. I went through the tables and totalled all benefits paid at intervals from 1936 first to OAS and then from the introduction of DI in 1957. Breakdown in comments at AB but the total of benefits paid out from 1941 to 2007 was $12.636 trillion (Tables IV.A2 and IV.A4) of which fully half came since the election of President Bush ($6.330 trillion).

Plus all of that has actually been funded through Pay/Go with $2.3 trillion left over. Which makes the following kind of inoperative:
""Why must the system increase net receipts by $13.6 trillion if it is already requiring current and future workers to pay in more than they will receive? The answer relates to the system’s generosity to early birth cohorts — generations of workers now either retired or deceased. Social Security paid these previous cohorts benefits that exceeded their lifetime contributions by more than $13.6 trillion."

Even if you changed "paid" to "paid or will pay" this would not be right. And I don't care who wrote it, he or she has convused PV of unfunded liability over the Infinite Future with payments to past cohorts.

Anonymous said...

One thing that would concern me about raising the NRA, would be the evidence I've seen regarding the differnital in mortality attributable to earnings/wealth. For example, I recently saw a paper from SSA office of policy on this effect. If I recall, the mortality differential was widening quite considerably as well.

High earners tend to have lower mortality than low wage earners. Those low wage earners typically have more physically demanding jobs.

In addition, for such low wage workers retirment often isn't a choice but is forced upon them either by their employer through layoff or their body breaking down.


Andrew G. Biggs said...

AK -

A number of papers have documented increasing differences in life spans between the rich and poor.

However, how would raising the retirement age actually interact with those trends? An increase in the full retirement age is simply a reduction in benefits at any age at which you retire (for instance, increasing the retirement age from 65 to 67 simply implies that to get the same benefits you'd current get at 65 you'd now need to work to 67). So, as the chart above shows, this tends to hit rich and poor fairly evenly.

I'm not arguing that we shouldn't adjust the benefit formula to account for increasing disparities in life expectancies, but raising the retirement age doesn't really make the problem worse.


Anonymous said...


Given the disparity in life expectancy between high and low earners, wouldn't an increase in NRA decrease the PV of life time benefits for low earners more than high earners on a percentage basis. If a low earner has a LE at age 67 of 12 years and a high earner a LE of 18 years, then raising the NRA to age 70 would have a larger percentage impact on the low earner than the high earner, right?

From an actuarial perspective, I see the attractiveness of raising the NRA. However, in taken a broader view of the program I have a problem telling people in certain industries that they will do that work until age 70.

Changing the NRA to increase with LE expectancy could be done. I just think it would need to be done as part of a larger retirement model change.


Andrew G. Biggs said...


I think you're confusing the effects of raising the normal retirement age (66/67), which is simply a uniform percentage benefit cut for everyone, with raising the early retirement age (62) which can have disparate effects. I'll try to post a spreadsheet which will illustrate how the two are different.


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