Economics, Entitlements

Is raising the retirement age really regressive?

12.4.12 Biggs Chart 1

In his (most recent) piece on class warfare, Paul Krugman writes:

Consider, as a prime example, the push to raise the retirement age, the age of eligibility for Medicare, or both. This is only reasonable, we’re told — after all, life expectancy has risen, so shouldn’t we all retire later? In reality, however, it would be a hugely regressive policy change, imposing severe burdens on lower- and middle-income Americans while barely affecting the wealthy. Why? First of all, the increase in life expectancy is concentrated among the affluent; why should janitors have to retire later because lawyers are living longer? Second, both Social Security and Medicare are much more important, relative to income, to less-affluent Americans, so delaying their availability would be a far more severe hit to ordinary families than to the top 1 percent.

But is that true? It’s first important to acknowledge that Social Security reforms don’t occur in a vacuum: Plans that increase the normal retirement age (NRA) almost always make other changes, such as progressive benefit cuts, an increase in the taxable maximum wage, the introduction of minimum benefits for low earners, etc. – that would offset any regressive effects of raising the retirement age. It’s the package that matters and Krugman should look at the package.

Second, you need to consider interactions with disability benefits. Truly low-income individuals are disproportionately on disability, which wouldn’t be cut by an increase in the retirement age. Moreover, the share of individuals’ claim disability would likely rise, since there would be more years prior to the NRA for a disabling event to occur. For the program as a whole, raising the retirement age might make it more progressive.

To check, I simulated an increase in the Normal Retirement Age for members of the 1990 birth cohort using the Policy Simulation Group’s models. I assumed an increase in the NRA to 70 by the year 2075, so for the 1990 cohort the NRA would be around 69. Since taxes wouldn’t change, I focused on benefits: For each quintile of the lifetime earnings distribution, I calculated the percent of total lifetime benefits received. For instance, under current law the top 20% of earners receive around 37% of total lifetime benefits. That’s both because they earn more and get higher monthly benefits and because high earners tend to live longer.

The results are a little hard to interpret. The share of benefits for the bottom earnings quintile drops by around 0.6 percentage points. This group has very, very low average benefits since it generally captures the people who fail to survive to retirement age. The benefit share for the second quintile rises, as it does for the third (middle) quintile and the fourth. Total benefits decline by around 3.3 percentage points for the top earnings quintile. These folks rarely claim disability and so would be hit hardest by the higher retirement age.

As with many distributional questions, it’s a little tough to say whether raising the retirement age makes Social Security more or less progressive. But it’s pretty clearly wrong to say, as Krugman does, that a higher retirement age is “hugely regressive.”

13 thoughts on “Is raising the retirement age really regressive?

  1. The pattern is “as long as it screws someone without a million in the bank, we’re for it.”

    No matter what. A philosophy that mandates that all wealth gets sucked upwards into a narrow overlord class.

    That’s the AEI in a nutshell. And what a nut it is.

  2. Hi Mr. Biggs, have you commented on Old-Age Risk Sharing, the Social Security proposal from Jed Graham of Investor’s Business Daily? It seems to me like a promising idea, but unlike you I’m not an expert on this issue. One feature, I think, is that he would raise the retirement age for high-income workers, but not for low-income workers. If I got that right, this would appear to make Social Security more progressive than it already is.

    • I’m familiar with the plan and know Jed Graham pretty well; he’s a sharp guy and it’s a well thought-out plan. I suspect there may be a way to get at the same goals with fewer moving parts, and simplicity is a big factor for me since I think the current program is way too complex for most people to understand. But Jed’s plan would nevertheless be an improvement over the current setup.

  3. Paul Krugman is almost ALWAYS wrong these days. I often wonder if he’s not suffering from some form of premature senile dementia. How anyone who demonstrated such spectacular brilliance as a young economist could be so utterly absurd on so many issues over the past fifteen-odd years makes no sense otherwise.

    • Well, a) any increase in the retirement age would take place over a REALLY long time. E.g., in my example the retirement age didn’t reach 70 until 2075. Hopefully we’ll be out of the recession by then. And b) there’s no evidence that more seniors working means fewer jobs for younger people. Since more seniors with jobs means more seniors with money, which they’ll presumably spend, that will create more jobs among others. The Center for Retirement Research at Boston College recently published a paper showing that labor supply among seniors doesn’t hurt job prospects for the young.

      • Maybe, but if you look at the quote you used, he is clearly referring to a raise in the Medicare age. It made me wonder why you chose to talk only about Social Security.

        But even if you do look at Social Security in isolation, you are not addressing the reasons given for why such a policy change would be regressive.

        As you mention in your post, the reason life expectancy is going up is because higher income people are living longer, not because everyone is living longer. Lower income people live a life of blue collar work and intermittent access to health care, so their health has deteriorated much more than higher income people when they are in their late 60s, so extending one’s working life by a few years will have a much greater negative impact on the health and savings of lower income people than on higher income people. That makes it a regressive policy.

        • That might be true in isolation- but you can hardly separate the benefit end from the contribution end. The money HAS to come from somewhere, and payroll taxes are remarkable regressive. You can only milk the wealthy cow in so many ways. What we end up with is a massive transfer of wealth from from the poor young to the (relatively) wealthy old. That makes no sense. You feed the cycle of poverty by sucking away money from the young that could be used for building wealth via home ownership, establishing a healthy family, education etc… all of which are habits that lead to long and healthy life. Thats a nasty cycle.

  4. “Truly low-income individuals are disproportionately on disability, which wouldn’t be cut by an increase in the retirement age.”
    Evidence please? And those that aren’t ( on disability ) are just SOL, right?
    That the results ” are hard to interpret” simply shows how fuzzy making projections of this nature are. And when it isn’t your welfare that’s being affected, being fuzzy is fine, right?
    Better to simply raise the payroll tax ceiling for SS, and implement means-testing for Medicare.

    • I can dig up the data on disability, but do you think high income people are more likely to claim DI?

      When I say the results are ‘hard to interpret’ it’s because there’s a slight decline in the share of benefits paid to the absolute poorest individuals, followed by an increase for the second through fourth quintiles, then a larger decline for the highest-earning quintile. It’s not unambiguous, but it’s clearly not ‘hugely regressive’.

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