Nov. 14, 2006
CONTACT: Tom Tozer, 615-898-2919
MURFREESBORO—Raising the normal retirement age (NRA) to maintain the solvency of Social Security seems like a good idea. However, younger job seekers would then have fewer opportunities from which to choose if their elders had to keep working longer to collect their SS benefits.
That’ s just one observation in a study conducted earlier this year by Drs. William Ford, Weatherford Chair of Finance, and Franklin Michello, associate professor, economics and finance, in the Jones College of Business titled “The Unemployment Effects of Proposed Changes in Social Security’s ‘Normal Retirement Age.’” The study was subsequently published in the prestigious “Business Economics.” Ford and Michello contend that the desire to reform Social Security and reduce unemployment can be conflicting objectives.
“Some of the many proposals for reforming SS involve either raising taxes or cutting benefits,” Ford noted. “Before World War II, 17 workers paid into SS for every retiree. Today, it’s down to 3 to 1, which means that a smaller number of workers relative to a growing number of retirees will have to pay more taxes. And the problem with cutting benefits is that if you do that, and also raise the NRA, many older workers who are just plain worn out will wind up on welfare, which will offset some hoped for improvements in the system’s financial viability.
“We think raising the retirement age is something that should not happen,” Ford said. “The longer you extend the retirement age, the higher the risk that older folks may not be able to keep working and may even get fired. Then they’ll be counted as unemployed instead of retired.”
Ford and Michello suggest that if the economy were persistently robust and the risk of inflation high, it might then make sense to encourage older workers to work longer to relieve labor market pressures. They point out that a cyclically adjusted retirement age during periods of low unemployment is when you might want people to work longer. If there were a severe, cyclical labor shortage, one might then encourage workers to stay on the job. However, that has not been the case in recent years.
Additionally, the trend toward early retirement has already begun to reverse itself. they contend. Life expectancy continues to increase, therefore, people have to plan for additional years of retirement. The so-called “Baby Boomers” aren’t saving enough to afford even normal retirement. While there’s about a $150 billion annual surplus right now in the SS budgets, the agency claims its trust fund is in debt because of a huge, long-term, unfunded liability that will surface as the “Boomers” retire.
“The amount of payroll taxes coming in continues to grow slowly, but the amount going out to retirees is accelerating,” Ford pointed out, adding that around the year 2015, those two lines will cross. “At that point, Social Security will have to dip into its Trust Fund, which contains nothing but government debt obligations. This means when they hand it to the Treasury, the Treasury either has to raise taxes or incur an even larger national debt,” he explained.
Right now the SS payroll tax rate is 12.6 percent, with the employee and employer each paying half. Ford and Michello project that rate will reach 13 or 14 percent in just a few years.
Ford and Michello also believe also that more research needs to be done before a decision is made to raise the NRA. In periods when there is already substantial unemployment, raising the NRA would only add to unemployment without making any positive impact on the SS system’s bleak financial outlook. Furthermore, they point out, unemployed people do not make FICA payments, which would only put a greater burden on the system.
Finally, public opinion polls also have consistently indicated that people do not favor raising the NRA, and it would be difficult to implement in today’s political environment. Out of political necessity, therefore, policy makers will be pressed to look for alternative solutions, the authors contend, such as partially privatizing the system, changing the current age 62 early-SS-retirement option or reducing the annual inflation increments paid to retirees.