New paper: Should the Retirement Age Be Increased?

"Social Security Reform: Should the Retirement Age Be Increased?", by Benjamin A. Templin, Thomas Jefferson School of Law. December 5, 2010

Thomas Jefferson School of Law Research Paper No. 1720402

Abstract:     
In 2010, increasing the retirement age became a focal point of Social Security reform proposals. In a controversial move, President Obama's bipartisan National Commission on Fiscal Responsibility and Reform recommended increasing the full retirement age from 67 to 69 and the age at which benefits could first be claimed from 62 to 64. Both ages would be indexed to increases in longevity so further increases would be possible.

This paper is a comprehensive analysis of the issues surrounding the retirement age provisions in the Social Security Act. The paper considers the four statutory age-related factors affecting benefits - the full retirement age (FRA), the early eligibility age (EEA), the retirement earnings test and the delayed retirement credit. The principal arguments - both for and against an increase - are analyzed to the degree to which each achieves the goals of the Social Security Act. The paper reviews the literature on relevant issues including longevity rates, poverty rates, capacity to work among the elderly, labor force participation among older workers, deficit reduction, and retirement income.

The paper concludes that while most American workers have the capacity to absorb the impact of an increase in the full retirement age, the principal benefit of a deficit reduction could be achieved through alternative reforms, such an increase in the cap on taxable income, a change in COLA calculations and diversification of the Trust Fund.

The paper does, however, endorse an increase in the early eligibility age from 62 to 64. While this reform would not seriously improve the long-term deficit, it would likely keep workers in the labor force longer and increase general tax revenues. Keeping workers in the labor force is a principal goal of the Social Security system; yet contains many disincentives to delay retirement. Behavioral economics helps inform the importance of this measure given that people sacrifice long term economic goals for short-term gains. Raising the early eligibility age by two years will make it necessary for most workers to stay in the labor force longer; thereby increasing their potential benefits and increasing their eventual retirement income.

In order to soften the impact on workers engaged in psychically demanding labor, this paper agrees with the National Commission on Fiscal Responsibility and Reform recommendation to establish a hardship exception to an increase in the EEA for workers who don't qualify for disability but lack the physical capacity to work past 62.

Finally, the paper recommends a series of additional reforms to provide incentives to stay in the labor force. These include eliminating the retirement earnings test, increasing the delayed retirement credit and reducing payroll taxes for older