Bending the Aging Curve

We've spoken a lot about Social Security reform the last few days, in the context of solvency, sustainability, and direct effects on the budget. But we haven't yet talked about reform in the context of our overall fiscal and economic picture. On the fiscal side, our fundamental problem is the growth of entitlement spending, and this is driven by both health care cost growth and by population aging. Aging effects not only Social Security's costs, but Medicare's and Medicaid's as well.

We've written many times on the importance of bending the health care cost curve - putting measures in place which exert downward pressure on economy-wide health care costs can make other hard choices at least a little bit easier. What we don't talk about, enough, is trying to "bend the aging curve" -- or to put it more accurately, deal with our decreasing dependency ratio.

Given the consequences of an aging society, though, we should be thinking hard about these issues. Population aging will not only drive up entitlement costs by creating new retirees, but it will also undermine the revenue base by decreasing the relative number of (tax-paying) workers. An older society is also a slower growing society, as there are less workers (labor) and less net savers (investors) in the economy.

But all is not lost, we can both mitigate and address the consequences of population aging -- and can do so through Social Security reform. Of course one option is to just change the demographic factors: fertility, immigration, and mortality -- though we can't imagine these changes would be very popular, especially in the context of Social Security reform. Check out the book Boomsday, which gives a whole new meaning to the word "death panel."

More seriously, we can change the dependency ratio by getting people to work longer. In this way, we could turn would-be retirees into workers, improving income tax revenue, labor supply, savings and investments (and therefore capital stock), and individual retirement security.

Getting people to work longer is not an impossible venture. Since Social Security was established, there have been tremendous gains in life expectancy at birth -- yet average retirement age has continued to fall. As of 2008, the average retirement age was about 62, (not so) conicidentally the same age that Social Security begins offering benefits.

Social Security has many levers which can be pulled to reverse this trend. The most commonly cited option, here, is to raise the Normal Retirement Age (which is currently 66 and scheduled to increase to 67). This age serves as a powerful signal for retirement, and gradually increasing it would likely encourage longer work and help reduce Social Security's shortfalls at the same time. An even more powerful lever is the Earliest Eligibility Age, the first age at when beneficiaries can begin to collect benefits (currently 62). Raising this age would not only encourage longer work, but would protect retirees from recieving permanantly lower benefits by accepting the full downward actuarial adjustment that comes with retiring early. (Of course policymakers would need to think through how to protect those who truly cannot work beyond 62 -- perhaps by strengthening the disability system).

Other Social Security reform option could also help encourage longer working lives. For example, we could increase the number of years used to compute benefits, offer a payroll tax cut for individuals who have worked more than 45 years, increase the penalty for early retirement, or change the way we distribute benefits -- perhaps through something like Jed Graham's Old Age Risk Sharing.

Of course, we can't count on longer working lives to solve all of our fiscal and economic problems. We also can't count on Social Security to force these changes by itself. In fact, we should also be looking at changes to Medicare, pension rules, certain tax and regulatory policies, etc; and we need to change the culture to allow people more flexibility to work at old age and phase into retirement as they would like and are able to.

But as we do reform Social Security, we should be thinking about the broader fiscal and economic issues -- especially those revolving around work.

See CRFB Policy Director Marc Goldwein debating this issue here.

Click here to read our Celebrating Social Security's 75th series.