Arguments for raising Social Security’s full retirement age

Raising the normal retirement age for Social Security benefits will likely be among the reforms Congress considers to address the program’s long-term financial challenges, the American Academy of Actuaries explains in a new issue brief.

Social Security’s Board of Trustees projects income to the system will be insufficient to pay promised benefits beginning around 2034 when trust fund reserves are depleted — unless Congress takes corrective action before then.

While numerous bills have been introduced on Capitol Hill over the years to tweak Social Security benefits and payroll taxes in the name of fixing the system’s long-term finances, overall Social Security reform is not imminent. And if history is any guide, most changes would be prospective, with little impact on current or near retirees.

Social Security’s financial problems stem partly from the impact of individuals living longer and receiving benefits for a longer period — a trend that is expected to continue for the foreseeable future. The graying of America also contributes to the imbalance between taxpaying workers and benefit-receiving retirees. In 1960, there were 5.1 workers paying taxes to fund Social Security benefits for each retiree. By 2020, that worker-to-retiree ratio had dropped to 2.7 and it's expected to slip further, to 2.3, by 2035.

As originally designed in 1935, Social Security defined normal retirement age, when workers could receive full benefits, as 65. In 1940, when Social Security began paying monthly benefits to retired workers, those workers who survived to age 65 had average remaining life expectancy of 11.9 years for men and 13.4 years for women.

As part of the solution to a solvency crisis in 1983, Congress agreed to a gradual increase in the normal retirement age from 65 to 67. Based on 2019 mortality rates, life expectancy for retirees at age 65 had increased to 18.1 years for men and 20.6 years for women, the actuaries report said. In other words, since Social Security began paying monthly benefits, life expectancy at age 65 rose roughly 6.5 years, while the age for collecting full benefits increased by only two years.

The first cohort of Americans for whom 67 is the normal retirement age turn 62 this year, the earliest eligibility age to claim Social Security. But filing in 2022 would result in a 30% reduction in their benefits because they claimed them five years before their normal retirement age. That compares to a 25% reduction for someone with a normal retirement age of 66 (born from 1943 to 1954) who filed for benefits at 62, four years before their normal retirement age.

Even with the existing increase in retirement age, a continuing pattern of increased longevity means the
Social Security system is facing another impending solvency challenge. Some reform package, likely including changes to both the system's benefits and payroll taxes, will be necessary to ensure the system's solvency through the 2030s and beyond.

“The fact that increased longevity is among the root causes of Social Security financial problems suggests that raising the normal retirement age is a likely — and perhaps even necessary — component of any package of program changes that address them,” the report said. “An increase in the normal retirement age would reduce the benefit payable at any given claiming age while providing an incentive for delayed retirement and longer working lifetimes.”

If the normal retirement age were gradually raised to 70, as some legislative proposals suggest, someone who claimed benefits at the earliest age of 62 would incur three additional years of reductions, receiving just 57% of their full retirement age benefit amount — an amount unlikely to be adequate for most future retirees.

In addition, longevity expectations aren't uniform across the population. Better-educated, higher-income workers tend to live longer than lower-wage workers. Thus, any proposed changes in the normal retirement age would likely have a greater impact on lower-income workers, who depend more heavily on Social Security for the bulk of their retirement income.

Social Security reform is inevitable and raising the normal retirement age is just one of many options. The sooner Congress tackles this critical issue, the better, since delaying action will require more drastic and costly solutions. It's crucial that any changes be phased in gradually so people have time to adjust their retirement plans. Case in point, the last major reform package was passed nearly 40 years ago but it will not be fully implemented until 2027, when those who were born in 1960 reach their full retirement age of 67.

[Questions about Social Security rules? Find the answers in Mary Beth Franklin’s ebook at Maximizing Social Security Retirement Benefits]