March 10, 2013
Extending the Social Security and Medicare Eligiblity Ages
Extending the Social Security and Medicare Eligiblity Ages—Posner
In principle, as Becker shows, increasing the eligibility ages for these costly federal entitlement programs would substantially reduce the federal deficit. But the size of the reduction would depend on the behavioral consequences, a complex and uncertain issue. For example, many people undoubtedly will increase the amount of private health insurance that they carry and also increase their savings for retirement. Most of these additional benefits will probably be provided by employers, resulting in an offsetting reduction in wages. Since fringe benefits receive favorable tax treatment, such a shift reduces federal tax revenues, increasing the federal deficit. Furthermore, more people will apply for social security disability benefits (the effect, if the application is successful, is that the applicant receives social security benefits before he reaches eligibility age) and receive them; in addition, the legal and other administrative expenses of obtaining such benefits are much greater than the expenses of obtaining social security at the age of eligibility.
Other people who lose eligibility if the eligibility age is raised will be able to substitute Medicaid, another costly entitlements program although less generous than Medicare and funded only one-half by the federal government (the other half is funded by the states). And because people between the ages of 65 and 70 are on average healthier than those who are older, the savings to the Medicare program from an increase in the eligibility age will not be proportionate to the number of persons who become ineligible as a result of the increase.
Becker mentions that one impetus to the creation of the social security program back in the 1930s was to create more job opportunities for young people. I think that that is or should be a concern today. In a society in technological flux, like ours, an age-top-heavy work force may be an impediment to economic growth. There is also considerable youth unemployment today. Although this is not the occasion on which to explore the issue of "structural unemployment," I think it is at least arguable that automation, outsourcing, international competition, and changes in management practices may be shrinking the labor market. The more competition in labor markets the better for the economy, but the age discrimination laws shield older workers, to an extent anyway, from the competition of younger ones. (When I say "older" I have in mind not middle-aged men and women, but people in their late sixties who would be incentivized by the increase in eligibility ages to retire later.
Another problem with obtaining substantial economies from increasing eligibility ages is that of the phase-in period for the increases. In order not to upset people's expectations (upon which many of their employment, savings, and insurance decisions may have been based) too drastically, proposals for increasing the eligibility ages for social security and Medicare invariably provide for a gradual phase-in of the higher eligibility ages. The phase-in for increasing the eligibility age for full social security benefits from 65 to 67, a change in law that was enacted in 1983, spans the period 2000 to 2022—thus taking 39 years from enactment to completion, with no changes in the first 17 years. A faster track to a lower deficit would be a reduction in social security and Medicare benefits immediately for affluent persons.
Unless the phase-in period is enormously long, in which event increasing eligibility ages would not be considered worthwhile, increasing those ages is unlikely to be politically feasible. Middle-aged people will think they are being "forced" to work at a time of their life when they will be "entitled" to be enjoying retirement. That is, people expect life to get better over time. Raising eligibility ages, especially for Medicare, because it is so generously open-ended, will be widely interpreted as telling people that life is not going to get better over time—because most elderly people don't want to work.
Despite the problems I have emphasized, raising the eligibility ages for social security and Medicare deserves serious consideration. But perhaps equal or greater emphasis should be given to other ways of reducing the cost of these entitlement programs, such as measures, comparable those of employers and health insurance companies, to increase the incentives of hospitals and doctors that provide Medicare services to economize, as by eliminating redundant treatments and excessive screening for low-probability health problems. The Affordable Health Act tries to do this, and in addition the reduction in Medicare reimbursement that the Act mandates will put pressure on the providers to economize.
Extending Social Security and Medicare Eligibility Ages-Becker
During the height of the Great Depression in 1935, with unemployment rates around 20%, the US introduced a social security system that made taxpayer-funded income available to workers if they retired at age 65 or older. This was combined with a tax on the earnings of employed persons that was supposed to finance the incomes to retirees. The purpose of the system was partly to get older workers out of the labor force so that more of the then scarce jobs would become available to younger workers.
At the beginning, this system was not expensive since retirement payments were not generous, life expectancy at age 65 was then around 12 years, and coverage of the working population was quite limited. All this greatly changed during subsequent decades. Social security retirement incomes have risen greatly, partly due to highly generous adjustments for increases in the cost of living. In addition, the average person who retires at age 65 now lives for about 19 years, because life expectancy after age 65 has increased greatly.
An even larger source of the increased cost to taxpayers of benefits provided to older persons is the introduction of Medicare in 1965 that provides expensive medical care for men and women over age 65. Social security retirement income and Medicare-financed health care have become a major part of spending: they are about 8% of GDP and 1/3rd of the federal budget. These shares will rise greatly during the next couple of decades unless major reforms are introduced into these programs.
One obvious reform would be to raise the age of eligibility for both social security income and Medicare benefits. It is surprising that while life expectancy of older persons has been growing rather rapidly for the past several decades, and jobs have become less physically demanding, actual retirement ages have declined from the 1930s. The average age of retirement is now under 65 (about age 64) because a significant fraction of men and women take retirement at age 62 when workers first become eligible to receive social security retirement benefits.
In light of the increase in life expectancy after age 65 and the decline in physically demanding jobs, it would be reasonable for the eligibility age for social security to rise to 68 or 70. The average age of retirement from the labor force for Japanese males is already only a little below 70, which shows that much higher retirement ages is feasible. Persons who are physically or mentally incapable of working would then opt for disability status. This is a rapidly growing category in most developed countries, despite the increase in physical and mental health of older persons, because of a weakening of qualifying standards. With more flexible labor markets for the elderly, such as reducing the fear of companies that they will be sued for discrimination against older workers, older men and women could retire from more demanding jobs, and take jobs that are less taxing. This is what happens to older men in Japan.
An increase in the average retirement age from 64 to 68 would save about 20 percent in social security payments since the average number of years in retirement would be cut by about 20%. Similarly, an increase in retirement age to 70 would save about 25 percent in social security retirement benefits. Either change would also add significantly to revenue from social security taxes since workers would be employed for several additional years. Therefore, such increases in age of eligibility for social security benefits would go a long way toward solving the looming social security financial "crisis".
Once a later age of retirement was introduced, it would be much easier to raise the age of eligibility for Medicare benefits. The great majority of older workers would be covered by their employers' health insurance plans, and would continue to receive the health benefits provided by these plans. Coverage of workers in their later 60s would add to the cost of company plans, but not by extraordinary amounts since medical spending by the average person between 65-70 (in good part under Medicare) is only a little more than 10% greater than that of persons aged 60-65. Moreover, spending on health care by older persons is lower under private plans than under Medicare because the greater deductions and co-pays in private plans induce individuals to economize more on their medical spending.
The savings in public health care spending from a higher age of of eligibility for Medicare and social security benefits would not be as large a fraction of Medicare spending as of spending on social security since per capita spending on medical care gets much larger as people get into their 70s and 80s. Still, it would make a sizable dent in Medicare spending.
Higher ages of eligibility for social security and Medicare benefits alone would not solve the looming entitlement budgetary crisis. However, they would make big contributions toward the solution without requiring radical changes in the level of benefits received by eligible persons.