One of the key reasons cited for possibly raising the retirement age for Social Security is that life expectancy has gotten much longer than when the Program started back in 1936. While that is true, a longer life expectancy at birth does not mean the same thing as more years of retirement.
As the graph below shows (from this source), life expectancy at birth (bottom line), increased significantly over the course of the 20th century. For men it rose from just over 50 years to more than 80. For women the increase was only slightly less dramatic, from about 57 years to 85 years.
Most of that improvement came from lower infant mortality. In 1900, it was common for children to die from diseases that have now been more or less eliminated, at least in the developed world. Penicillin was not generally available until after WWII.
As far as Social Security is concerned, changes in infant mortality are totally irrelevant. Yes, if someone dies when they are 2 years old, they will never collect Social Security benefits. They will never pay into the system, either. As far as the Social Security system is concerned, it is as if the person never existed.
The improvement in life expectancy from age 20 has been less dramatic (very feint middle line), and about half of the improvement occurred before the Social Security program was started.
The reduction in youth mortality (between ages five and 20) has been very dramatic, to the point where life expectancy at age 20 is almost the same as life expectancy at birth. In addition to medical advances, things like safer cars and seat belts have played a big role in reducing the chance that one will die before age 20. That is the age when most people start to contribute to Social Security.
Optimum for Social Security Solvency
From the actuary’s point of view, the best thing a person can due to make the Social Security system solvent is to die shortly after your 65th birthday. Then you will have paid in for a lifetime, and collect nothing (other than a very nominal death benefit).
What really counts for the Social Security system is the change in life expectancy at age 65 (top line). That has increased much more modestly. The retirement age for Social Security is already rising gradually, from age 65 to age 67. This takes care of most of the increase in life expectancy at age 65 that has occurred since Social Security started 75 years ago.
Raising the retirement age is the equivalent of an across-the-board cut in benefits. Since the poor and working class tend to die earlier than the upper middle class and the wealthy, it is a cut that will hit the poor the hardest. They also tend to have jobs that are more physically demanding. It is one thing for a lawyer (or an equity strategist) to continue working until age 67 or even 75; it is quite another for a coal miner to continue working at that age.
Dedicated Revenue Source
Keep in mind that the Social Security system has its own dedicated revenue source: the payroll tax. That tax is applied to the very first dollar of income, but stops after you have earned about $105,000 for the year. Those who make claims about what percentage of taxes that the wealthy pay almost only talk about the income tax, and forget about the payroll tax.
These people tend to make statements like almost half of all Americans pay no taxes. That is simply not true. It is the equivalent of saying that practicing Mormons pay no taxes, which is true if the only taxes you are considering are excise taxes on booze and smokes.
Anticipating the demographic bulge from the retirement of the Baby Boomers, payroll taxes were increased significantly during the Reagan Administration. The idea was to “over pay” on taxes and build up a surplus. That surplus was then invested in the most conservative investment around, Treasury Notes. That surplus now stands at about $2.5 Trillion.
In building up that surplus and investing in T-notes, the Social Security system has been massively subsidizing the rest of the government, which is largely funded by income taxes. It is true that the relatively wealthy pay most of the income taxes.
Two Scenarios
Left to its own devices, the Social Security system can redeem the bonds that it has build up since 1983, and pay every nickel of scheduled benefits until 2037 under the intermediate case the Social Security actuaries use. They also put out two alternative scenarios: a high cost one and a low cost one. Under the low-cost scenario, the system is fully funded forever, and over the last few decades, the actual results of the Social Security system have come closer to matching the projections of the low-cost scenario than the intermediate case.
However, if the Social Security side of the government is redeeming its bonds, the other side of the government will have to replace them with other bondholders, cut non-Social Security spending or raise taxes. Social Security is, of course, one of the major line-items in the combined Federal Budget. The only other things that come close are Defense spending and Medicare/Medicaid (although interest on the debt is making a run to make it the Big Four instead of the Big Three).
Medicare/Medicaid and Insolvency Issues
Medicare/Medicaid is often lumped in with Social Security and called “entitlements.” But Social Security is in good shape financially, provided that the government does not default on the bonds that it holds. The same is not true of Medicare. There, costs are exploding, driven by medical inflation that consistently runs higher than inflation elsewhere in the economy.
The Health Care Reform (ACA) partially addressed the problem, and according to the program’s actuaries, added 12 years to the fiscal solvency of that program, but it is still only expected to be solvent through 2029. After that point, the dedicated revenue stream for Medicare Part A will only be able to cover 85% of the projected costs. That, however, is a massive improvement over being solvent only through 2017.
If the ACA were to be repealed, then Medicare would go back to the brink of insolvency very quickly. More has to be done to bring down health care costs. The estimates are based on current law, however, which assumes that the mandated cuts in Medicare reimbursement rates will all come to pass. That is not all too likely, so Medicare is probably in worse shape than the 2029 exhaustion date would imply.
With Social Security, while taxes will fall short of benefits in 2011, mostly due to the Recession and the temporary cut in the payroll tax, it will not have to touch the principal of the Trust fund until 2024. The interest on $2.5 Trillion is a lot of money.
That $2.5 billion represents the (forced) savings of millions of people, most of whom have very little in other assets (especially since the main repository of middle class wealth, home equity, has largely evaporated). Declaring that those assets are “worthless IOU’s” and cutting benefits is just another big way of ripping them off.
