Subtleties of life expectancy, cont.

Today, Aaron Carroll joins Ryan Grim and Jonathan Chait in highlighting a subtlety in the calculation of the effect of increased longevity on social security costs. Ever-increasing longevity has been used to justify raising the retirement age in the Bowles-Simpson deficit reduction plan (to 69 by 2075 for full retirement).  The catch is this: life expectancy for those who reach age 65 has risen far more modestly than life expectancy from birth:

First, if you made it to 65, even back in 1950, you could expect to be on Social Security for 14 years... life expectancy for someone who lives to 65 and qualifies for these programs, hasn’t gone up as much, or as quickly, as people think.

The reason that Social Security has become more costly is not nearly as much that people are living longer on the program, as it is that many more people were born into the generation approaching 65. They aren’t getting more benefit individually; as a group there’s just more of them. When you argue that you want to raise the age at which they start to 68, instead of 65, you’re basicly giving them as many years on the program as a person who hit 65 in the mid 1970′s. That’s a pretty big change [i.e., we've been getting more years in recent decades?].

There's a further subtlety, though, that's been left out of this discussion. It's true that life expectancy before age 65 does not affect the total size of the benefit that retirees collect.  I presume, however, that it does affect the ratio of active workers to beneficiaries -- though I will note at the outset that that ratio has been remarkably stable since 1975, ranging from 3.2 to 3.4 in every year except 2009, when it dipped to 3.0. And I would guess that that dip occurred mainly because the number of employed workers dropped so precipitously in the Great Recession. 

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.