How about 78 as the retirement age?

Ok, I'm not actually proposing 78 as the retirement age. But the fact that a case can be made for it explains something about the options available for Social Security reform. From AEI's Enterprise Blog…

 

The New York Times' Room for Debate blog highlights disparate opinions on whether to raise Social Security's retirement age and, if so, how high to go. All the posts, from a range of experts on both sides of the issue, are worth reading. Here's my quick take, which I don't think any of them adequately covered.

Social Security, as its defenders like to point out, isn't a savings program but an insurance program. (I've argued that most of what goes on is really just forced savings, but that's a point for another day.) But if it's insurance, what is it insuring against?

Social Security's disability and survivors plans have obvious insurance functions: insuring against the disability or death of an eligible worker. But what does the retirement portion of Social Security insure against? Consider this: a person who entered the workforce in the 1930s, when Social Security first began, had only around a 65 percent chance of surviving to retirement age. Under these circumstances, it might make sense to prepare for retirement through an insurance model rather than a savings model, just as we prepare for other unlikely events through insurance.

Now let's ask, what is the age that a 20-year old today has only a 65 percent chance of surviving to? It's around age 78. In other words, by a pure insurance approach, 78 would be an appropriate age to start paying benefits. At younger ages the probability of surviving is much higher, such that the best approach isn't to insure against survival but to save for it.

What we've seen with Social Security—as with other government programs—is insurance for unlikely events creeping into provision for things that individuals can and should provide mostly for themselves. It's not a coincidence that even as life expectancies have risen, the typical age of retirement has fallen from 68 in the 1950s to around 62 today.

I have nothing against people retiring at 62, or even earlier if they can afford it. And some individuals simply cannot work longer. But for the vast majority of Americans, who are healthier and have better work conditions than ever before, it's hard to point to a pressing need for government to provide retirement benefits covering a third of their adult lives. Encouraging individuals to retire so early is a waste of government resources and, perhaps more importantly, a waste of human talent.