Monday, January 23, 2006
Index Social Security to Life Expectancy
Numerous attempts to "fix" Social Security over the last thirty years failed to address the underlying root cause of the imbalance in the system. The president attempted to solve the problem with a bizarre scheme of putting the security of the elderly into the hands of the stock market.
The patches and fixes of the last 30 years failed because people are simply living a lot longer. This trend shows no signs of slowing down, and some scientists speculate the "natural" lifetime of human beings might actually be as high as 120 years.
Over the years, the minimum retirement age of 62 has remained basically the same since early retirement for men was instituted in 1961.
Under the current system, increasing full retirement age to 67 is being phased in over a period of many years. With each passing year, the penalty for retiring at age 62 increases in the form of lower monthly benefits. Yet, for the vast majority of people, the financial incentives to retire early remain. That is, with early retirement, most people end up with more money in the long run.
The solution: index the minimum retirement age to average life expectancy.
The minimum retirement age would be revised annually, much as we do now with cost-of-living adjustments. Average life expectancy would be determined by a government bureau, just as the increases in the cost-of-living are now. A phase-in period would be needed to allow people time to adjust their retirement planning.
Indexing the minimum retirement age would:
-Permanently solve trust fund balance problems
-Set up an automatic mechanism
-Insure the security of our elders
-Avoid the need for tax increases
It has been argued that longer lifespans do not mean people retain the ability to work much longer than they do now: but this idea has never been proven. Raising the minimum retirement age does not affect the rules on disability benefits. As it stands now, anyone under full retirement age can apply for a disability. If people age 64 became disabled, then they could still retire under the present rules.
Another argument against raising the minimum retirement age itthat it would disproportionately disadvantage those minorities who have shorter average life spans. Since some minorities have significantly shorter average life spans than others, the payout of Social Security would not be as great for them. In fact, it would be interesting to analyze the contributions and payout ratios for various minorities and see who receives more as relates to the contributions. Since the average pay for minorities varies significantly, the situation is far more complex than it first appears.
As a nation, we still have time to solve Social Security’s long term financing problems. Current projections are that the system will be able to meet 100% of its obligations for 30 to 40 years. After that, the system will pay out about 70% of its obligations; a percentage which will decrease as time goes by.
We still have time, but whatever we do, we need to do it soon. With each passing day the solution becomes more difficult and expensive.
A report on the current state of the system is available here.