Friday, February 18, 2011

Should we increase the Social Security retirement age – or lower it??

The American Prospect hosts competing op-eds on the Social Security retirement age. The Urban Institute's Gene Steurle argues that, with lifespans rising, maintaining the current retirement age effectively turns Social Security into a program for the middle aged. The problem is, this leaves less money for the truly old, many of whom are also the truly poor. Steurle says:

In the case of the retirement age, we should be asking whether we really intended to create what Social Security has become -- increasingly a retirement system for people in middle age, most of whom report good or excellent health. For over half of beneficiaries retiring in their early 60s today, the result is that one member of a couple with average life expectancy spends well more than a quarter century retired. We need to ask whether such a system leaves Americans adequately prepared for old age and, more broadly, allows society to take advantage of older citizens' tremendous potential. That is, does the typical 62-year-old have more ability to give and less need for support than the typical 90-year-old?

By contrast, University of Texas professor James Galbraith argues for a lower retirement age as a way to stimulate the economy:

Once workers are retired and receiving steady pensions, they will become sources of effective demand and not weak petitioners for jobs. As a result, the private sector will grow around the provision of food, shelter, care, and services to this population. Thus, a dual effect helps to cut joblessness. Wage rates would also rise -- a third benefit, as workers become a bit scarce. And older people, of course, need not remain idle. Freed from wage toil, they can devote themselves to whatever pursuit they choose, including participation in civic and cultural life.

As a short-term measure it might have some effect, since it is effectively a large payout to near retirees. If the typical person claims reduced benefits at 63 and is allowed to retire with the full benefit that would be payable at age 66, that generates a roughly 21 percent benefit increase for affected cohorts. That said, this would be a tough policy to back out of once people realized the size of the giveaway.

Moreover, it wouldn't work over the long term. Over their lifetimes, people consume (more or less) what they produce, and if they produce less by retiring earlier they'll also lower their consumption by a little bit each year. (This is basically the 'life cycle' theory of consumption.) Now, retiring earlier might open up some positions, reduce the workforce and increase the demand for labor, but the lower spending due to shorter work lives would produce a roughly matching reduction in the demand for goods and services. Once we see that production and demand are linked, then the idea that less work equals more jobs pretty much falls apart.

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