Raising Social Security’s retirement age would slam low-wage workers yet again
Karl Polzer
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A proposal by Sens. Angus King (I-ME) and Bill Cassidy (R-LA) to raise the Social Security retirement age to 70 would be a massive benefit cut, particularly affecting low-wage workers. If Congress enacts it, millions more Social Security taxpayers would not live long enough to collect a cent in retirement benefits.
Most recently floated by presidential hopeful Nikki Haley, an increase in the age at which workers collect full benefits is often included in proposals to bring Social Security into financial balance along with other types of benefit cuts and tax increases.
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Few people realize that low-wage workers are already receiving a cut in lifetime Social Security benefits due to an increase in the retirement age to age 67 gradually being implemented under legislation enacted four decades ago. The age for collecting full benefits is going up two years for all income groups, but lifetime retirement income for those at the bottom is affected the most.
Why? Because low-wage workers, on average, live shorter lives. They already collect fewer Social Security checks than those who are better off. Though a higher retirement age may not affect differences in monthly payment rates, it would have a relatively greater negative impact on lifetime income for people with a history of low earnings. It would also affect the relative value of their benefits compared to taxes they paid.
Since Social Security was created during the Great Depression, life expectancy has diverged dramatically for low- and high-income people. While it continues to rise for the middle-class and affluent, life expectancy has remained flat for lower-income workers and now may be in decline. As I pointed out in a study published by the Society of Actuaries in 2020, this trend has reduced Social Security’s progressivity.
If Congress chooses to bump up the retirement age again to help restore Social Security’s long-term solvency, then the value of old-age benefits for low-income workers will decline in both absolute and relative terms. A Congressional Research Service report concluded that, because of the growing disparity in life expectancy by income, “policy proposals that increase the retirement age will tend to skew Social Security benefits toward higher earners.”
Many recent studies find the life expectancy gap between high and low earners is growing. In 2014, the Congressional Budget Office calculated that a 65-year-old man in the top 20% of lifetime earnings could be expected to live more than three years longer than a similar man in the lowest 20%. By 2039, the difference would double to six years. In a 2015 report, the National Academy of Sciences compared the 1930 and 1960 birth cohorts (people about 93 and 63 years old now) and found that life expectancy for the bottom quintile of men at age 50 decreased slightly to 26.1 years over the 30-year period. Meanwhile, life expectancy rose for men age 50 in higher-income quintiles. The life-expectancy gap between the bottom and top fifth of the income distribution widened by more than seven years (from 5.1 to 12.7 years).
A hypothetical illustration of how a two-year hike in retirement age eligibility shows the unequal impact. The low earner starts with annual Social Security benefits of $12,000; the higher earner, $36,000. The new policy would cause both to lose 24 monthly payments. Assuming the longevity gap remains constant (six years in this illustration), the relative impact on the low-wage worker would be much greater— a 25% loss versus a 14.3% loss of lifetime retirement benefits. Again, this occurs simply because, on average, the lower earner will die sooner and thus receive benefits for fewer years.
If the longevity gap were to widen by three years, as some analysts have projected, higher earners would end up getting 7.1% more in lifetime income than they otherwise would have received because their gain in life expectancy would more than compensate for the two-year benefit cut.
Congress does need to do something about Social Security’s finances. In 2021, the Office of the Chief Actuary estimated Social Security would need $16.8 trillion in present-value dollars to maintain its long-term solvency. The longer Congress plays chicken on this issue, the greater the risk that changes, such as tax increases or benefit cuts, or a combination, will have major economic effects on retirees and workers.
Program actuaries emphasize the growing ratio of retirees receiving benefits to workers contributing payroll taxes as a major factor impinging on the program’s solvency. But other forces are at work. Growing wealth and income inequality have significantly eroded Social Security’s tax base. As wealthier people continue to amass equities, bonds, and other assets, the portion of national income from capital investment has increased significantly. In the United States, labor’s share fell about 8 percentage points between 1995 and 2013. Since Social Security relies primarily on a tax on labor for its sustenance, the relative growth of capital income gradually has been choking off a source of revenue.
Congress could restore Social Security’s tax base by reestablishing and expanding funding provided by those who benefited from decades of growing wealth and income disparities. Collecting Social Security taxes above the current $160,200 cap and higher investment taxes could restore program solvency. More revenue could be collected through the estate tax and by closing a loophole through which investments can be inherited without being subject to capital gains taxes. Congress already has added extra Medicare taxes for high earners on both income and capital gains, thereby providing possible precedent to do the same for Social Security. If benefit cuts must be part of a Social Security rescue plan, they should be applied to beneficiaries with the highest levels of income and wealth. The minimum benefit for both Social Security and SSI should be raised at least to the poverty line.
Raising the standard retirement age is a benefit cut for the poor that is grossly unfair. It should not be on the table.
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Karl Polzer is the founder of the Center on Capital & Social Equity.