America’s retirement riddle

“Retirement age for U.S. Social Security benefits set at 75 years.” While that’s not the news headline today, it certainly could be in the not-too-distant future. With Social Security trust funds projected to be insolvent in 2035, America is again facing its retirement riddle.

When the Social Security Act was enacted in 1935, the minimum age for receiving retirement benefits was 65 years, which was higher than life expectancy at birth for men and women, 60 and 64 years, respectively. With 7 percent of the U.S. population aged 65 years or older at that time, there were 10 people in the working age group 15 to 64 years for each person aged 65 and above. 

Today Social Security full retirement benefits are payable at age 67 years for anyone born in 1960 or later, which is well below today’s life expectancy at birth for men and women, 76 and 81 years, respectively. Many, however, are choosing to retire as early as age 62 but doing so can result in a benefits reduction. Also, one can delay retirement up to age 70 and receive increased benefits.

While the retirement age for full benefits has increased by two years since Social Security was established, life expectancies at birth have increased by 16 years. With nearly 17 percent of the population aged 65 years or older, there are now four people in the age group 15 to 64 years for each person aged 65 and above and that number is projected to decline to three people by 2033. 

In the coming decades America’s population will become older and Americans will live longer. In 50 years, one quarter of the population is expected to be aged 65 years or older, with two people in age group 15 to 64 years for each person aged 65 years and above. Life expectancies at birth in 2070 are projected to be 84 years for men and 87 years for women, or nearly 25 years more than when Social Security was established. 

Resolving America’s retirement riddle is needed due to Social Security’s long-term financing problem. The Social Security Board of Trustees projects program costs to rise by 2035 so that incoming tax revenue will be only enough to pay 79 percent of scheduled benefits.

Congress can address Social Security’s financing problem by making adjustments in three critical variables: retirement benefits, payroll tax revenues and retirement age. The pension fund’s rate of return on its investments also affects its solvency, but given stock market risks, it is generally not open to adjustments by governmental policies. 

Some mistakenly believe that increasing the number of immigrant workers, or replacement migration, would resolve America’s retirement riddle. Immigration can certainly increase the size of the labor force. However, it is not a solution to population aging as it can only prevent it at unprecedented, unsustainable and increasing levels of migration inflow.

Few Americans are in favor of reducing Social Security benefits, including lower cost-of-living adjustments. Americans have come to rely heavily on Social Security benefits in their old age, especially as most have saved relatively little and lack employer based pensions, which are headed for extinction.

Moreover, if Social Security benefits were reduced, the poverty rate among Americans aged 65 years and older, which has declined by 70 percent over the past five decades to about 9 percent in 2019, would likely increase. 

Raising dedicated payroll and self-employment taxes of 12.4 percent and increasing the maximum taxable level of $142,800 in 2021 to cover Social Security’s rising costs are unsavory options for most elected government officials, business owners and those who are self-employed. Although Americans overwhelmingly support Social Security, raising taxes is politically unappealing and not fondly remembered by voters on election day. 

That leaves the third critical variable to adjust: retirement age. Raising the retirement age reduces the number of beneficiaries, thereby reducing the costs of the program. Raising the future retirement age, while not a popular proposition, encounters less political risks than reducing retirement benefits and increasing taxes.

To return to the 1940s demographic ratio of 10 in the working ages for each person in retirement age would require raising Social Security’s retirement age by 8 years, or to age 75. Today’s proportion of the American population aged 75 and older is about 7 percent, about the same proportion aged 65 years and older in 1935.

Also, in contrast to 1935 when the retirement age of 65 was higher than life expectancy at birth, a retirement age of 75 would be lower than today’s life expectancies at birth. Also, importantly, the expected years in retirement at age 75 today is about the same as it was at age 65 when Social Security was established, i.e., 11 years for men and 13 years for women.

Some, including university academics, career professionals, business executives and the self-employed may welcome working to age 75. However, most Americans say they plan to retire at around 65 to 67 years old and on average actually retire at around 61 years. 

Increasing the normal retirement age for Social Security benefits is not something to be done overnight. It needs to be done gradually with initial increases taking effect years in the future and likely coupled with eliminating the early retirement option to ensure full benefits in later years of retirement.

Although Americans are counting on Social Security in their retirement, they are not confident about its future. Of those not yet receiving benefits, nearly 70 percent lack confidence that they will receive their earned benefits at retirement.

It is well past the time for Congress to address Social Security’s financing problem, which it last did nearly 40 years ago with a combination of tax increases and benefit reductions. Continued delays by lawmakers makes it more difficult to address Social Security trust funds projected insolvency in 2035. In short, it’s time to resolve America’s retirement riddle. 

Joseph Chamie is a consulting demographer, a former director of the United Nations Population Division and author of numerous publications on population issues, including his recent book, “Births, Deaths, Migrations and Other Important Population Matters.”