By Theodore R. Marmor
and Jerry L. Mashaw
An old adage says that every problem has an obvious solution that is both simple and wrong. We fear this applies to the idea of increasing the formal retirement age for Social Security.
The widespread assumption is that the long-term financial health of the Social Security Administration requires raising the age of eligibility for full retirement benefits. This seems obvious for a few reasons.
First, although Social Security today has a huge surplus, projections suggest a shortfall in two decades unless something is done to shore up its finances. Requiring workers to wait longer to collect benefits would surely save money.
Second, Americans are living longer and staying healthier at older ages. So deferring retirement seems like a sensible and relatively painless way to help maintain America's most popular government program.
The difficulty is that the world is not as simple as this suggests, and the apparently painless reform could be quite painful indeed.
Social Security pensions are crucial to most low- and middle-income Americans' retirement income. Two-thirds of retirees get half or more of their retirement income from the program, and one-third are almost totally dependent on it. The average yearly benefit is only $14,000, so any reduction causes real pain in the lives of retirees whose working incomes were in the low to medium range.
Furthermore, benefit reductions are already taking place. The full retirement age is slowly increasing and will reach 67 in 2027. Each year of delay in pension payments results in a reduction in every worker's lifetime benefits of roughly 6.5 percent. Thus, when the current increases in the retirement age are fully phased in, workers will have experienced a 13 percent drop in benefits since 1983, when the retirement age began to creep up.
Meanwhile, premiums for Medicare's outpatient and drug coverage, which are deducted from Social Security payments, have risen much more rapidly than Social Security's cost-of-living adjustments.
Social Security's impact is already being diminished as a result of both developments. A medium earner's Social Security pension replaced roughly 39 percent of his prior earnings in 2005. By 2030, after the retirement age increase is phased in and given predicted Medicare premium increases, that figure is expected to drop to 32 percent.
