Social Security remains the most important source of income for most Americans in their retirement. Nonetheless, there are many proposals for cutting benefits that get serious consideration, including increasing the normal retirement age. A new report from the Center for Economic and Policy Research examines the impact of raising the Social Security retirement age and its effect on the distribution of wealth from loss of future Social Security benefits.
“The full retirement age for Social Security is already scheduled to increase to 67 over the next 10 years,” said Dean Baker, a co-director of CEPR and an author of the report. “Despite the fact that each year of increase in the normal retirement age is equal to a cut in benefits of 6 to 7 percent, some policy makers are calling for raising the retirement age as high as 70.”
The report, “The Impact on Inequality of Raising the Social Security Retirement Age,” projects the impact of a gradual increase of the normal retirement age on various demographic groups, looking at each quintile of the wealth distribution, as well as the richest 1 percent. The paper also contains separate projections for homeowners and non-homeowners, single individuals and couples in several age cohorts. These projections demonstrate that Social Security wealth is a much larger share of wealth for the bottom four of the five groups. As a result, an increase in the retirement age would cause an increase in inequality.
“Since those in the top income quintile have vastly more wealth than those in other quintiles, a loss of 7 percent of Social Security benefits will not affect their total wealth as dramatically as those in the other four quintiles,” continued Baker.
For example, non-homeowner couples in the lowest wealth quintile aged 35-44 in 2012, would see an 18 percent decline in wealth from a further increase in the retirement age. By contrast, the top quintile in the same age cohort would see a decline of just 8 percent. For the bottom quintile of homeowners in the 55-64 cohort, the increase in the retirement age implies a cut in wealth of more than 2 percent. The reduction in wealth for those in the top quintile is less than 1 percent.
Proponents of making immediate changes to Social Security often justify calls for reform by saying that the program faces a looming shortfall. However, the Congressional Budget Office projects that Social Security can pay all scheduled benefits through 2038. Even with no changes whatsoever to the program, Social Security will still be able to pay more than 80 percent of benefits until 2070 and only slightly less than that for decades afterward. And while some might argue that we are living longer and should retire later, this justification makes little sense for workers in physically demanding jobs who would find it difficult to work into their late 60s. Also, most of the gains in life expectancy have gone to high-income workers. As this report demonstrates, proposals to raise the retirement age would lead to a substantial upward redistribution of wealth.