It's time for the obvious: Raise the retirement age

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Jeff A. Petty
Jeff A. Petty
The impending Social Security crunch is not news to anyone. President Bush tried to address the issue right after his re-election, but without success. Unfortunately, it was—and still is—not considered an immediate crisis, just a nearly insurmountable one.

There are several reasons. Most people are not talking about the subject correctly. There is discussion about how the “Social Security Trust Fund” will run out of money by 2019, as though it actually exists, and implying that we don't need to be concerned about it until then.

Of course, there is no “trust fund.” And every day we wait to swallow our medicine will make it that much more draconian when we do, which we will have to, eventually. But, considering the overwhelming number of crises Americans are facing today, this simply doesn't feel like a priority.  

Peter G. Peterson, former U.S. Secretary of Commerce, co-founder of the Blackstone Group and author of “Running on Empty: How the Democratic and Republican Parties are Bankrupting Our Future and What Americans Can Do About It,” and David M. Walker, former U.S. Comptroller General and currently CEO of the Peter G. Peterson Foundation, have said that Social Security is the easy problem to fix.

Most challenging

The bigger problem, according to Walker, is with Medicare and Medicaid. These programs possess not only all the challenges of Social Security, caused by the aging of America and dearth of future active workers, but also the added complexities of the national healthcare morass that seem to defy solutions.

These entitlement programs are clearly unsustainable. By 2030, these programs, when coupled with interest on the national debt, will consume the entire federal budget, not to mention the effect of Medicaid on state budgets (which pay 43% of the total bill). By 2040, take the interest on the national debt out of the equation: Medicare, Social Security and the federal portion of the Medicaid program will be larger than the entire federal budget. 

As to what the tax burden or the reductions in benefits must be, there are any number of mind-numbing statistics out there, widely accepted and published by a broad range of experts from all political viewpoints, including the trustees of the Social Security and Medicare programs. They all agree the system is not sustainable. And, as I recently heard the economist Herb Stein quoted as saying, “Things that are unsustainable usually stop.”

So, what is the fix? There have been a number of ideas offered, and the ultimate solution will probably need to incorporate pieces of all of them. But, the only approach that addresses both the Social Security and Medicare/Medicaid programs is to increase the retirement age, which would be entirely consistent with the original intent of the plans.

The fundamental problem with the entitlement programs is too many people drawing benefits and too few paying for them. Since these programs are “pay as you go,” this mismatch came about for two reasons—the baby boomers followed by the subsequent decline in birth rates and the drastic rise in the population's longevity.

‘Blood and iron' origins

When Otto von Bismarck looked to create the first social retirement plan in 1880s Germany, he needed to establish the age of retirement. His actuaries advised him to select 65 because 95% of the population died before reaching this age, and, of those who lived past that, 95% died within three years. According to the 2003 National Vital Statistics Report, published by the Centers for Disease Control and Prevention (CDC), the current equivalent age in the U.S. – the age to which only 5% of the population lives—is 97 years old! And, if you live to 97, you have a 40% chance of surviving another three years. 

By the time Social Security was enacted in the early 1930s, the average life expectancy at age 65 was 11-plus years, roughly seven years less than today. By 2030, nearly 20% of the U.S. population will be over 65 years old. Thus, there has been a substantial decrease in the “real retirement age” since the inception of Social Security.

The system did not contemplate and cannot support 20% of the population drawing benefits. But why not reflect the increase in longevity in the retirement age—and index it in the future? In other words, hold the real retirement age constant. Now, we have “boldly” moved to a standard retirement age of 67 over a 21-year period, not ending until people born in 1959 are retiring. This isn't enough.

There are many arguments against such an increase in retirement. Some claim this is contrary to the interests of the lower class, whose livelihood is tied to physical labor and therefore difficult to maintain later in life—and they're right. Nonetheless, we have been steadily lowering the real retirement age for these folks along with everyone else; by indexing the age to life expectancy we're just restoring the original intent.

Reality: cuts needed

Others claim that by raising the retirement age we are cutting benefits, which we are. Again, this reduction in benefits is consistent with the programs' original intent. While both Medicare and Social Security have seen numerous expansions in benefits over the years, they have been explicitly voted on by Congress.  A reduction in the real retirement age never has been.

The power of increasing the retirement age is fourfold:

• First, we're not affecting anyone actually drawing benefits.

• Second, for every person who newly falls below the magic age, we are not only reducing the number drawing benefits by one, we are also increasing those paying in by one.

• Third, it profoundly affects (and may be the only solution that does) both Medicare and Social Security programs simultaneously.

• Finally, we retain the wisdom and experience of these folks in the workforce – where they will be desperately needed.

Raise the age. Now is a good time to start. 

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Jeff A. Petty is president and chief executive officer of Wesley Enhanced Living, a multi-site continuing care retirement community based in suburban Philadelphia.