Raise the Full Retirement Age for Social Security

Background

The age at which workers become eligible for full retirement benefits from Social Security—the full retirement age (FRA), also called the normal retirement age—depends on their year of birth. For workers born in 1937 or earlier, the FRA was 65. It increased in two-month increments for each successive birth year until it reached 66 for workers born in 1943. For workers born between 1944 and 1954, the FRA holds at 66, but it then increases again in two-month increments and reaches age 67 for workers born in 1960 or later. As a result, the FRA is 67 for workers who turn 62 in 2022 or later. The earliest age at which workers may start to receive reduced retirement benefits will remain 62; however, benefit reductions at that age will be larger for workers whose FRA is higher. For example, workers born in 1954 (whose FRA is 66) will receive a permanent 25 percent reduction in their monthly benefit amount if they claim benefits at age 62 rather than at their FRA, whereas workers born in 1960 (whose FRA is 67) will receive a 30 percent reduction if they claim benefits at 62.

Option

Under this option, the FRA would continue to increase from age 67 by two months per birth year beginning with workers turning 62 in 2023, until it reached age 70 for workers born in 1978 or later (who will turn 62 beginning in 2040). As under current law, workers could still choose to begin receiving reduced benefits at age 62, but the reduction in their initial monthly benefit would be larger, reaching 45 percent when the FRA is 70. This option would not reduce the benefits for workers who qualify for Social Security Disability Insurance (DI).

An increase in the FRA would reduce lifetime benefits for every affected Social Security recipient, regardless of the age at which a person claims benefits. Workers could maintain the same monthly benefit by claiming benefits at a later age, but then they would receive benefits for fewer years.

Effects on the Budget

This option would shrink federal outlays by $28 billion through 2028, the Congressional Budget Office estimates. By 2048, the option would reduce Social Security outlays from what would occur under current law by 8 percent; when measured as a percentage of total economic output, the reduction would be about 0.5 percentage points because outlays would fall from 6.3 percent to 5.8 percent of gross domestic product.

CBO's estimates reflect the projected age distribution of future beneficiaries and the benefit reductions that would occur at each claim age under this option. Savings would increase each year both because more beneficiaries would be subject to the higher FRA and because the reduction would be greater for each additional birth cohort of beneficiaries up to the 1978 cohort. However, overall savings could differ from the estimates shown here because of unexpected changes in the timing of benefit claiming.

Because many workers retire at the FRA, CBO estimates that increasing that age would result in some beneficiaries' working longer and claiming Social Security benefits later than they would under current law. The magnitude of that estimated effect is consistent with the change in claiming behavior that occurred after the FRA had increased from age 65 to age 66. (However, the estimates shown here do not include the budgetary effects of an increase in the overall supply of labor.) As the FRA increased to age 70 under this option, it is uncertain whether workers would continue to respond by working as many additional months as they did when the FRA increased to age 66.

Because the reduced benefits would create an incentive for workers to apply for DI benefits, which would not be affected by this option, the estimates shown here reflect the higher resulting applications and awards for the DI program. For example, under current law, workers who retire at age 62 in 2048 will receive 70 percent of their primary insurance amount (what they would have received had they claimed benefits at their FRA); if they qualify for DI benefits, however, they will receive the full amount. Under this option, workers who retired at 62 in 2048 would receive only 55 percent of their primary insurance amount, but they would still receive 100 percent if they qualified for DI benefits. As a result, CBO estimates, the total benefits for the DI program in 2048 would be slightly higher under this option relative to the total benefits under current law.

To achieve additional savings, the FRA could be increased more quickly or could continue beyond age 70. A one-year increase in the FRA would be equivalent to a reduction in the monthly benefit of about 6 percent to 8 percent, depending on the age at which a recipient chose to claim benefits and the recipient's FRA. For claims before the FRA, benefits would be reduced 5/9 of a percent for each of the first 36 months before the FRA. For example, if workers claimed benefits three years before the FRA, their benefits would be reduced by 20 percent. For claims more than three years before the FRA, benefits would be further reduced by 5/12 of a percent for each additional month, or 5 percent per year. For example, if workers claimed benefits five years before the FRA, their benefits would be reduced by 30 percent. (Conversely, for workers who claimed benefits after their FRA, the benefits ould be increased by 8/12 of a percent per month because of delayed retirement credits.)

Some proposals to increase the FRA also would increase the earliest eligibility age (EEA)—when participants may first claim retirement benefits—from 62. Increasing the EEA together with the FRA would cause federal spending to be lower in the first few decades fter implementation and higher in later decades than if only the FRA was increased. A higher EEA would prevent some people from claiming any Social Security benefits in the year in which they would first become eligible under current law; however, those people's monthly benefits would be higher when they ultimately became eligible for benefits under the higher EEA.

Other Effects

An argument for this option is that people who turn 65 today will, on average, live significantly longer and collect Social Security benefits for more years than retirees did in the past, increasing their average lifetime Social Security benefits. In 1940, life expectancy at 65—the number of additional years a person was expected to live after reaching that age—was 11.9 years for men and 13.4 years for women. Since that time, life expectancy at 65 has risen by more than six years, to 18.2 years for men and 20.7 years for women. Therefore, a commitment to provide retired workers with a certain monthly benefit beginning at age 65 today is significantly more costly than that same commitment made to recipients in 1940. However, the gains in life expectancy have not been uniform: In recent decades, life expectancy has generally increased more quickly for beneficiaries with higher lifetime earnings, who receive higher Social Security benefits.

An argument against this option is that it would increase the incentive for workers nearing retirement to stop working and apply for DI benefits. To eliminate that added incentive to apply for disability benefits, policymakers could narrow the difference in benefit amounts by also reducing scheduled disability payments.

In addition, increasing only the FRA would increase the risk of poverty at older ages for people who did not respond to the increase in the FRA by delaying the age at which they claimed benefits or by applying for DI benefits. If the option was accompanied by an increase in the EEA, poverty at older ages would be reduced. However, for people who depended on retirement benefits at age 62, increasing the EEA would cause financial hardship, even if the total lifetime value of their benefits would be generally unchanged.