Retiring later a tough sell in cutting deficit

Suppose Congress could adopt a simple measure that all at once takes a giant step toward taming huge budget deficits and gives a powerful boost to the economy and employment. It would pass in a minute, right?

Wrong. While the proposal would seem to present the best of all worlds for legislators who are serious about gaining control over the mounting federal debt and helping the economy, few politicians today will even touch it.

Even so, the Congressional Budget Office recently found that gradually raising the retirement age by just three years for seniors to collect Social Security and Medicare benefits would go a long way toward curing the looming shortfalls in those programs, while giving a major shot in the arm to the economy so it can create more jobs and better support the retiring population.

The measure would curb government outlays for the program by $380 billion in the first 10 years, the CBO estimates, but that’s only the beginning. Within 25 years, it would cut the public debt by about 20 percent, and within 30 years it would slash the debt by about one-third.

Meanwhile, gradually raising the full Social Security retirement age to 70 from 67 and Medicare’s retirement age to 67 would increase the size of the economy by 1 percent, or $150 billion within a decade, mostly by keeping older, skilled and productive Americans working a few years longer. The boon to the economy would triple within 50 years, according to the CBO’s conservative estimates.

The reduction in the projected federal debt might be even more dramatic and amount to as much as 80 percent by 2060, when all the beneficial effects from boosting the economy are taken into account, according to the Committee for a Responsible Federal Budget.

Private studies have corroborated the powerful effects for the debt and the economy. One study by the McKinsey Global Institute estimates that a two-year increase in the median retirement age would boost economic output by as much as $13 trillion in the next three decades.

“Not a solution to all of our problems, to be sure, but also not a bad place to start,” the budget group noted in a blog posting.

Bipartisan backers

Numerous good-government and budget watchdog groups have advocated raising the age of eligibility for the retirement programs, including increasing Social Security’s early retirement age from 62 to 65. France, Italy and other nations in Europe, confronted with a debt crisis, are already raising their retirement ages.

President Obama’s bipartisan deficit commission was one of the latest to endorse the idea in December 2010, and the proposal is often included in bipartisan budget reform plans in Congress.

The idea was discussed in backroom negotiations last year between Mr. Obama and House Majority Leader John A. Boehner, Ohio Republican, though they failed to produce an elusive “grand bargain” that would include such major entitlement reforms and instead called for deep cuts in defense and domestic discretionary programs.

Mr. Boehner has openly advocated a later retirement age for years, noting that people are healthier and living longer and the government will not be able to sustain current levels of retirement benefits without huge tax increases. Some prominent Democrats, including House Minority Whip Steny H. Hoyer of Maryland, also have advocated the idea.

While it is far from popular, economists and budget analysts say it makes sense because today’s seniors live on average nearly 10 years longer than they did in 1940 in the program’s early years, and most people do not have physically taxing jobs that prevent them from working awhile longer.

Moreover, Americans are increasingly willing to stay on the job. Surveys show that most baby boomers realize they may have to keep working. In fact, most will have to do so because they failed to save enough money for retirement or lost much of their savings with the collapse of the housing and stock markets in recent years.

“Our research shows that many boomers actually do want to continue working,” said Eric D. Beinhocker, one of the authors of the 2008 McKinsey study, which surveyed 5,100 households and found that two-thirds of boomers are financially unprepared for retirement.

“Boomers will have to continue working beyond the traditional retirement age” if they hope to maintain their standards of living, he said. Simply postponing retirement by two years would enable about half of those without adequate savings to retire comfortably, he said.

Retirement sticker shock

The boomers face “a difficult economic adjustment” as they approach retirement in any case because of their poor savings habits and high levels of debt, Mr. Beinhocker said. But they have “always been an adaptable generation, and there’s no reason to believe that their resourcefulness will disappear as they age.”

If baby boomers retire at the same age as their parents’ generation, as currently envisioned under Social Security, that will significantly depress economic growth by causing a steep drop in labor force participation from 64 percent to 60 percent and restraining consumer spending - producing chronically low growth rates of 2 percent on average, the McKinsey study estimates.

While it may be a pain to many people to have to work a couple of years longer, their greater contribution to the labor force and economy would help solve a lot of problems, boosting economic output by $13 trillion, raising savings by $400 billion and “easing the impact of aging on Social Security and Medicare,” the study said.

Eighty-five percent of boomers realize they may have to work longer, the study found. By keeping the retirement age at levels set decades ago, Congress is discouraging many boomers from following their better instincts and working longer to improve their living conditions in old age, the study found.

To accommodate more older workers, other institutional adjustments will be needed, such as flexible work arrangements at businesses to allow seniors to continue working part time or from home.

With Social Security facing a long-term deficit of $7.7 trillion, “it’s time to increase the retirement age,” said Heritage Foundation analyst David C. John. “Social Security was never intended to be the sole source of retirement income that it has become for many Americans,” he said.

Congress should go beyond a one-time increase in the retirement age and index it in the future to automatically increase with rising life spans, he said.

To accommodate the minority of seniors who are no longer physically able to work at a more advanced age, Congress should create an exception that allows those people to collect Social Security disability benefits, he said.

“Congress does not have the luxury of delaying hard decisions,” as Social Security already has a cash-flow deficit and its insolvency gets closer each year, Mr. John said. “This may not be a pleasant message, but it is a fair one” that most Americans will understand, he said.