Tuesday, May 10, 2011

An alternative to raising the retirement age for Social Security

Alan Simpson, of Bowles-Simpson fame, is a die-hard for raising the eligibility age for social security, as the Bowles-Simpson plan proposes.  Ryan Grim reports (hat tip: Chait) that Simpson is a tad unreceptive to to information furnished by the Social Security administration to the effect that life expectancy for those who reach age 65 has risen only modestly since 1940 (about five years each for men and women).  Meanwhile, the retirement age for receiving full social security benefits has been raised from 65 to 67 -- so the system is paying people for an average of three more years than it did for retirees in 1940. 

The Bowles-Simpson plan calls for a roughly proportionate rise in early and full retirement ages -- to 68 in 2050 and 69 in 2075 for full retirement, an to 63 and 64 at the same points for early retirement.  Opponents of that change point out that it is implicitly regressive, since lower income people have shorter life expectancy, and those who do manual labor find it harder to work to older ages. Besides, few people want to work deep into their sixties, and there are other ways of making social security solvent. In Bowles-Simpson as in other plans, raising the retirement age is only one in a broad menu of ways to raise further revenue or reduce the growth of benefits.

The social security segment of the deficit reduction plan put forward by the Bipartisan Policy Center does take increased life expectancy into account, but in a different way.  The BPC proposes to index the benefit formula to longevity : "Specifically, the replacement rates used to calculate benefits each year for new beneficiaries will by 99.7 percent of what they were in the previous year -- which offsets about two-thirds of the additional costs associated with estimated longevity increases." This plan treats social security like an annuity, which is calculated on the basis of life expectancy. 

The two approaches simply take opposite sides of one of life's core tradeoffs: time versus money. Under the BPC plan, we all take a bit less in order to retire a bit earlier.

Bowles Simpson and the BPC are substantially similar in two major changes to social security: both would raise the FICA cap to the range of $180-190k to hit social security's statutory target of taxing of 90% of  wage income, and both would reduce the cost of living adjustment by using a so-called chain-weighted consumer price index, which takes into account consumer behavior in response to price hikes for specific items (i.e., if broccoli spikes, we may buy more spinach). In a prior post, I examined the major difference between the two plans: what they do to the formula that determines what percentage of our average monthly earnings we get back as a social security pension.  Bowles-Simpson slashes the current take of far more people than does the BPC.

1 comment:

  1. Your SS posts have been more descriptive, so forgive me if this is inappropriate, but...

    1. Chained CPI is stupid. (pdf)

    2. If we're going to live longer in retirement, why can't we pay for it? All these "hide the benefit cut" games seem to defeat the purpose of social insrance.