High Variance

Is It Cruel to Raise the Retirement Age?

I like Paul Krugman a lot–we’re both liberals and believe strongly in the value of big government and thougtful regulation. Unfortunately, he sometimes has strong opinions about things he hasn’t thought through. That’s my only explanation for his recent article on the “cruelty” of raising the Social Security retirement age–a policy I think is smart on almost every dimension.

The Social Security system was designed after the Great Depression to do two things: keep old people out of poverty and insure against disability that prevents people from working to support themselves. The disability insurance part of Social Security is less well-known than its retirement benefits but is very important and I have nothing to say about it today. You’ll note that I didn’t mention a third objective: funding a long retirement for most people after they’ve worked a sufficient number of years. The Social Security system is expected to provide this now, but it certainly wasn’t at the beginning.

In 1930, the average white 20 year old male could be expected to live to age 66 (source). If he made it to age 40, he could expect to live to age 69, and if he made it to age 50, his expected age of death increased to about 72 years. During the bulk of the years he contributed to Social Security, he was expecting a fairly short (1 to 7 year) period after age 65 when he could actually retire with full benefits. Even FDR didn’t see the goal as funding people’s “golden years”:

"We can never insure one hundred percent of the population against
one hundred percent of the hazards and vicissitudes of life, but we
have tried to frame a law which will give some measure of protection
to the average citizen and to his family against the loss of a job
and against poverty-ridden old age."

-- President Roosevelt upon signing Social Security Act ([source](http://www.ssa.gov/history/briefhistory3.html))

Contrast this with the experiences of people in 2004 (the latest year I could easily find data). A 20 year old expected to live to 77 years, a 40 year old to 78 years, and a 50 year old to 79 years. The expected duration of retirement ranged from 12 to 14 years. Krugman is right that the expected length of retirement upon reaching age 65 has not changed all that much (from 14 years to almost 20 years), but that’s irrelevant to people’s expectations during working life.

Other things have changed since the Social Security was enacted too. While original benefits were high enough to keep retirees out of poverty, modern levels replace a much larger fraction of income. Jobs are a lot less physically demanding today. In 1940, 26.7% of those employed worked on farms or did miscellaneous forms of physical labor relative to just 5.9% in 1990. And in 1940, only 21.3% of workers were managers, officials, clerical workers, or professionals. This ballooned to more than half the work force by 1990. (More detailed breakdowns here). Finally, I’m pretty sure physical health of those who do survive to 65 is better now than it has been in the past though I couldn’t easily find data to back that up.

Most people who reach 651 are strongly enouraged by the incentives in the Social Security system to retire even though they are perfectly capable of being highly productive members of the work force. I believe their experience is a huge untapped resource for the economy. But what of the people that Krugman is worried about: Those who worked physically stressful jobs for years and at age 65 don’t expect to live all that much longer. I have a heart and I worry about this group too. Suppose we let people retire at age 65 but capped their benefits at a relatively low level. This constraint would be unbinding for those who worked low paying (and more likely physically demanding) jobs. At the same time, it would encourage relatively wealthier (and healthier) folks to work until they were, say, 70 years old. If wealthier people really want to retire earlier, they can save more during their working lives and rely on Social Security for what it was designed: insurance against poverty in old age. We all win!

benefits at 62 and higher benefits if they wait until the “full retirement age” of 65. The amounts are designed to make the people fairly indifferent between the two dates. In the next few years, the full retirement age will be going up to age 67 (details here).

  1. Currently the system allows people to retire with some