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Practice Management

NRA to the Rescue of Social Security?

John Iekel

The challenges the Social Security system faces have been much discussed for almost half a century, and one of the answers often suggested is raising the normal retirement age (NRA). A recent paper examines that option. 

In the issue paper “Raising the Social Security Retirement Age,” the American Academy of Actuaries provides background information on the NRA and the effects that raising it could have on the system. 

Setting the Table 

The paper notes that Social Security Board of Trustees projects that unless legislation is enacted to improve the situation, the long-run prospects for the system is bleak, and the money that comes into it will be insufficient to finance benefits under the current formula. 

This situation, it says, arises out of a number of circumstances—particularly from increasing longevity, one consequence of which is a longer period in which individuals will receive benefits. And that will not be changing any time soon, according to the paper, which says “this trend is expected to continue indefinitely into the future.”

When the Social Security program was established in 1935, the NRA was set at age 65. The NRA began to increase after the enactment of Social Security reforms in 1983, in recognition of the substantial increases in life expectancy that had taken place since its first days. The NRA was gradually increased to age 66 for workers born in 1943, and remained at that age for the following 12 years, before gradually increasing to age 67 for workers born in or after 1960, who will reach age 67 in 2027 and later.

Further, the paper points out, retirees’ life expectancy after the NRA has been increasing. In 1940, it was around 12 years for men and just over 13 years for women; in 2019, it increased to just over 18 years for men, and 20.6 years for women. And, the paper adds, there is a general expectation that life expectancy will continue to increase.

Workers long had the option of receiving reduced retirement benefits as early as age 62, and the 1983 reforms did not change that. With early reception of Social Security benefits, the monthly amounts are reduced to compensate for earlier payment and the longer period they are paid out. 

Another demographic trend that the paper points out that will affect the solvency of the Social Security system is that the number of workers contributing to the system is falling, while the number of retirees receiving benefits is growing. 

The Argument for Raising the NRA

When the 1983 reforms were enacted, says the paper, Social Security had immediate solvency problems. Now, it says, the matter is different—not as immediate, but nonetheless “a major financial challenge.” This time, the academy says, the problem is that projected income over the next 75 years will be inadequate to pay benefits under the current formula. 

If changes are not made, steadily increasing longevity will result in higher lifetime Social Security benefits since retirees will receive benefits for a longer time, the paper warns. However, it argues, raising the NRA will help. 

Raising the NRA—and thereby increasing the age at which retired workers can begin to receive unreduced Social Security benefits—would make up at least a part of this shortfall by reducing benefit outlays, says the paper, which would improve the finances of the Social Security system. Furthermore, they argue, raising the NRA would not only reduce the benefits payable at any given claiming age, it also would provide an incentive to delay retirement.

The paper argues that changes that result in workers working longer without accruing commensurately higher benefits would strengthen the system by: (1) increasing the number of workers who make payroll tax contributions; (2) cutting the number of retirees receiving benefits; and (3) paying benefits over a shorter period. 

Not raising the NRA would necessitate “significant” increases in payroll taxes, they warn; furthermore, that would create a higher financial burden on workers and compromise the effect of higher productivity to an extent. 

The academy suggests that raising the NRA may not be a radical nor a controversial move, observing that the average age at which people start collecting Social Security benefits generally has been increasing over the last 10-15 years. It adds that the average age at which Social Security recipients start collecting has increased by more than a year since 2005, and the percentage of workers doing so at the earliest age possible has fallen by almost half, while the percentage collecting after normal retirement age has roughly tripled.

And raising the NRA would have other benefits, some economists point out, such as: 

  • increasing national income and savings;
  • providing workers more time to save for retirement; 
  • tapping the skills and experience of older workers, which would benefit employers and the overall economy; and
  • workers’ improved physical and mental well-being.

But Not a Panacea

Raising the NRA would help the finances of the Social Security system, the academy argues, but it has its limitations.  

While raising the NRA would help offset the effects of increasing longevity, the paper says, it also would mean that benefits would be lower relative to expectations under current law. As each generation expects to live longer after retiring than the one before, a gradual increase in the NRA would slow the rate of increase in the value of lifetime benefits.

And the benefits of raising the NRA may be uneven, the academy says. It says that there is “considerable variation across the socioeconomic spectrum” regarding longevity expectations. The paper says that many expect that increases in life expectancy will be stronger among those who are better educated and have higher wages, and that this implies that increasing the NRA and postponing retirement would have a higher impact on the value of benefits for those earning lower wages. 

The academy says that many believe that there will be an increasing trend toward longevity increasing more strongly among better-educated and higher-wage workers than among lower-wage workers. This gap, it argues, implies that an increase in NRA and later retirement can be presumed to have a greater impact on the value of benefits for lower-wage workers than higher-wage workers.

However, at the same time, the paper cites statistics that note that the impact of increasing levels of obesity and substance abuse, which primarily affect those who are young or middle-aged, “has been skewed by levels of income and educational attainment.”

Furthermore, the paper says, basing changes to the Social Security system on a presumption of a longer time in the workforce will not have a uniform effect. It notes that work demands differ across types of occupations, and health status and life expectancy vary across socioeconomic groups. “This means,” says the academy, “that while most Americans can be presumed able to work longer, this expectation may prove problematic or overly burdensome for some.”

And raising the NRA could even impose costs, the paper notes, including:

  • encouraging impaired workers whose age is younger than the NRA to file for disability benefits; 
  • higher expenses for employers to provide compensation and unemployment insurance;
  • higher health plan costs; and
  • the need to modify retirement strategies to encourage older employees to work longer. 

And the benefits of changing the NRA do not extend to also changing the earliest retirement age, argues the academy. It reasons that since the reduction approximately reflects what it costs the system if one retires early, a change in the earliest retirement age is likely would have a minimal impact on Social Security finances.

The Bottom Line 

There are certain fundamental truths and basic factors entailed in the matter of raising the NRA, says the academy. It argues that since increased longevity is one of the reasons that the Social Security system is having financial problems suggests that raising the NRA “is a likely—perhaps even necessary” part of any effort to address those problems. 

“Program solvency must be restored so that the system can continue providing benefits,” says the paper, but adding a note of caution as well, saying that “any program redesign should not jeopardize the system’s ability to provide an adequate level of retirement income for American workers.” And, it argues, those changes also should take into account broader needs and concerns of society.