Raise the Full Retirement Age in Social Security

The age at which workers become eligible for full retirement benefits--the full retirement age, also called the normal retirement age--depends on their year of birth. For workers born before 1938, that age was 65. The age of eligibility increased in two-month increments until it reached 66 for workers born in 1943. For workers born between 1944 and 1954, the age holds at 66, but it increases again in two-month increments until reaching 67 for workers born in 1960 or later. Workers who turn 62 in 2022 or later will be subject to a full retirement age of 67. Workers will continue to be able to receive benefits at age 62, but at that age, the amount of benefits is smaller than the amount they would receive by waiting until the full retirement age to claim benefits.

Under this option, the full retirement age would increase by two-month increments for 6 years, rising to 66 years and 2 months for workers born in 1950 (who turn 62 in 2012) and reaching 67 for workers who were born in 1955 or later (who turn 62 in 2017 or later). Thereafter, it would continue to increase by two months per year until reaching 70 for workers born in 1973 (who turn 62 in 2035). As under current law, workers could still choose to begin receiving reduced benefits at 62, but the reductions would be larger. The benefits of workers who qualify for disability insurance would not be reduced under this approach.

This approach to constraining growth is equivalent in its effects on benefits to reducing earnings-replacement rates. (Mandatory Spending--Option 28 offers an alternative method of reducing those rates.) Depending on the age at which a worker claims benefits, a one-year increase in the full retirement age is equivalent to a reduction in a retired worker's monthly benefit of between 5 percent and 8 percent. Because many workers retire at the full retirement age, increasing that age is likely to result in beneficiaries' making claims later than they would if a policy with identical benefits at each age was implemented through adjustments in the benefit formula. For the same reason, this option also would probably lead workers to remain employed longer, which would increase the size of the workforce and boost federal revenues from income and payroll taxes. Moreover, the additional work would result in higher future Social Security benefits, although the increase in benefits would be smaller than the increase in revenues. The 10-year estimates for this option do not include those two effects.

This option would shrink federal outlays by about $12 billion over 5 years and by nearly $120 billion over 10 years. By 2050, the option would reduce Social Security outlays relative to what would occur under current law by 12 percent--from 5.9 percent to 5.2 percent of gross domestic product.

A rationale for this option is that people who turn 65 today will, on average, collect Social Security benefits for significantly longer than retirees did in the past and the average life span in the United States is expected to continue to lengthen. In 1940, life expectancy at age 65 was 11.9 years for men and 13.4 years for women. The Social Security trustees estimate that life expectancy has risen by more than 5 years for 65-year-olds, to 17.3 years for men and 19.7 years for women, and that those figures will increase to 19.0 years and 21.1 years by 2035. Therefore, a commitment to provide retired workers with a certain monthly benefit beginning at age 65 in 2035 is significantly more costly than is that same commitment made to today's recipients. An argument against this option is that it would reduce resources provided to older people, relative to those that are scheduled to be provided under current law. In addition, it would create a somewhat stronger incentive for older workers nearing retirement to apply for disability benefits. Under current law, workers who retire at age 62 in 2035 will receive 70 percent of their primary insurance amount (the benefit they would have received if they had claimed benefits at their full retirement age); if they qualify for disability benefits, however, they will receive 100 percent of that amount. Under this option, workers who retired at 62 in 2035 would receive only 55 percent of their primary insurance amount; they would still receive 100 percent if they qualified for disability bene-the difference by also reducing scheduled disability pay- fits. The estimates of the budgetary effects of this option ments--for example, by setting the benefits for disabled account for the effect on the Social Security Disability workers at the amount they would have received upon Insurance program. To eliminate that added incentive to retiring at age 65. apply for disability benefits, policymakers could narrow