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April 25, 2019, 1:17 p.m. EDT

Indexing for retirees’ life expectancy could help fix Social Security’s finances

We index Social Security benefits for inflation. What about indexing for life expectancy?

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By Brenton Smith


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Concerns about Social Security never seem to disappear. Here, a protester in 2001.

Do you believe that retirees on average should draw larger and larger lifetime benefits from Social Security without paying more?

Whether you agree or disagree, understand that the trustees of the program attribute a growing portion of the Social Security shortfall to an ever-increasing length of retirement for which workers are not asked to pay more. Specifically, these experts assume that life expectancy of a retiree will continue to grow progressively longer over the balance of the century. At the same time, they believe that Congress will choose to ignore over decades the impact that these changes have on the program’s financial health.

While life expectancy does not increase the size of the monthly payment, it changes the number of checks that a retiree expects to collect. Increased longevity means that workers are more likely attain the age of eligibility, and that retirees will tend to collect over a longer period of time. In other words, the overall retirement protection provided by Social Security expands with life expectancy.

How long will you live?

If you hit 65 in this year your remaining life expectancy in years is
Men Women
2017 19.1 21.6
2030 20 22.3
2060 21.7 23.9
2095 23.4 25.4

Source: Social Security Administration Table V.A5

Where’s the extra income for Social Security?

When people hear about the impact of life expectancy on Social Security, they generally think about the changes over the past 80 years when the length of retirement rose by roughly 50%. What they may not realize is that payroll tax rates increased more than 500% over that period .

The problem with future increases in longevity is there is no incremental income in the pipeline to offset the rising costs. While lifetime benefits rise sharply, workers will continue to pay the same rates over a career of the same length. In fact, the Trustees 2018 Report specifically cites the link between increases life expectancy after the year 2050 and widening gaps between cost and income of the program .

While these costs may appear rather distant in time, they actually influence the debate about the program today because the program’s health is measured over a 75-year horizon. With every passing year, the forecast draws in figures from another outer year plagued with programmatic generosity.

Policy experts tend to summarize the period cash flows into more manageable terms. In total the present value of the program’s deficit over the next 75 years is $13.2 trillion. That sum is further summarized as a percentage of future taxable payrolls, currently 2.84%. This metric is the benchmark against which all proposals dealing with Social Security.

Here is the problem with the summary information. It can’t distinguish between a cost created by a system that promises more than it can deliver and a cost created by the expectation of failed politics.

There’s a simple solution: We should index the age of eligibility to life expectancy of a retiree so that retirement length remains constant. “Indexing” means that the system would set the retirement age based upon changes in expected longevity rather than legislative action. As a result, the program’s financial health would depend more on math and less on politics.

Separately, the solution adds a measure of fairness to the system by neutralizing the structural benefit increases that come with people living longer in retirement. Indexing would mean that everyone would get roughly the same length of retirement, where future seniors would simply collect little later in life.

How indexing might work in practice

Ultimately, the details of this strategy would provoke much-needed debate — by politicians and, hopefully, voters. For example, some will argue that the length of retirement is currently falling thanks to the changes to the retirement age dating back to 1983. That is true. The last time Social Security was in trouble, Congress gradually raised the age of retirement from 65, so full retirement is delayed by 2 months every year until it reaches age 67. (This will be reached for those born in 1960 or later.) This increase is substantially faster than changes in expected longevity.

As we all know, any fall in retirement length will not last forever. At some point, we need to agree upon how many years of retirement Social Security should fund. People should need to know how much lead-time they would get before knowing a firm retirement date. Moreover, policy makers would have to think about how a change in retirement age would affect early retirement.

The bottom line

While the structure of indexing would require substantial thought, the impact is very clear. The actuaries at the Social Security Administration report that indexing retirement age might address nearly 20% of the system’s short-term financing gaps. More importantly, this concept could eliminate 36% of the funding gap projected in the 75th year.

The hard truth is that indexing the retirement age will not address the entire problem within Social Security. But it does reduce the cost of broken politics.

Brenton Smith writes about Social Security.

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