CBO expects that the share of older people who work will increase in the latter part of this decade in response to the scheduled increase in the full retirement age (FRA) for Social Security. As a result, economic output will be slightly greater and budget deficits slightly smaller than would otherwise be the case. This blog entry explains CBO’s estimate of the effect of the change in Social Security on the size of the U.S. labor force—an effect that is incorporated in CBO’s economic and budget projections for the next decade (in The Budget and Economic Outlook: Fiscal Years 2012 to 2022) and the longer term (in The 2012 Long-Term Budget Outlook).
The FRA, the age at which participants are eligible to receive full Social Security retirement benefits, rose by two months per year during the past decade. It increased from age 65 for people born before 1943 to age 66 for people born from 1943 through 1954. Under current law, for people who turn 62 starting in 2017, the FRA will rise again by two months per year until it reaches age 67 for people who were born after 1959 (see the figure below).
CBO expects that the effect of increasing the FRA from age 66 to age 67 will be similar to the effect of increasing it from age 65 to age 66. As CBO described earlier this year in Raising the Ages of Eligibility for Medicare and Social Security, many people affected by that increase to age 66 delayed claiming Social Security benefits in response (see the figure below). That delay occurred in part because the FRA acts as a signal about when to claim benefits and also because the increase in the FRA meant that if a person started collecting benefits at age 65, those benefits would have been smaller than they would have been without the increase in the FRA. As a result, people tend to work longer on average when the FRA increases.
In addition to the increase in the FRA, five other factors appear to have contributed to the delay in retirement during the past decade:
- A legislated relaxation of the earnings test, which reduces current Social Security benefits when a person has earnings that exceed a certain amount;
- A legislated increase in the delayed retirement credit, which increases monthly payments for people who wait until after the FRA to claim Social Security benefits;
- An ongoing shift among private pension plans from a defined-benefit structure to a defined-contribution structure;
- Rising levels of educational attainment; and
- A rising proportion of older women who have been in the workforce for a long time.
In CBO’s assessment, those other factors have mostly played out and probably will not have significant further effects in increasing the amount of work by people at older ages going forward.
Based on the available evidence regarding the response of workers to the various changes that took place during the past decade, CBO estimates that about half of the increase in the share of people age 62 or older who participated in the labor force during the 2000s can be attributed to the increase in the FRA. The evidence also suggests that the effect was larger at higher ages and smaller at lower ages. For example, among people eligible to claim Social Security benefits, the increase in the FRA made 66-year-olds more likely to postpone claiming for a year than 62-year-olds. Because people often coordinate their decisions to retire and to claim Social Security benefits, CBO estimates that the increase in the FRA increased the labor force participation rate at age 66 more than at age 62. CBO uses that relationship to project rates of labor force participation for older people as the FRA rises from age 66 to age 67 under current law.
The resulting rise in the projected rates of labor force participation for older people is noteworthy. For men ages 62 to 64, CBO projects that the rate of labor force participation will rise from about 52 percent in 2012 to about 55 percent in 2022. For men ages 65 to 69, the projected rate rises from about 37 percent in 2012 to about 41 percent in 2022. The changes for women are similar: The projected rate of labor force participation for women ages 62 to 64 rises from about 44 percent to about 48 percent, and for women ages 65 to 69, the projected rate increases from about 28 percent to about 32 percent. In 2022, the FRA will be 67 only for people age 62 or younger in that year. As that group ages and the FRA gradually becomes 67 for all older people, CBO projects that the labor force participation rate for older people will continue to increase, although at a slower pace.
CBO uses those projected rates of labor force participation by age group to project the overall participation rate and the total labor force over the next ten years and beyond. (For more on the agency’s approach, see CBO’s Labor Force Projections Through 2021.) The total labor force is the product of the size of the civilian noninstitutional population (that is, people who are age 16 or older, not in the military, and not living in institutions like prisons, mental facilities, or nursing homes) and the overall rate of labor force participation. The latter reflects economic conditions, patterns of participation by people in specific age groups over time, and the influence of policies in current law, including the increase in the FRA discussed here. Some aspects of current law will modestly reduce the size of the labor force in the coming decade. Real (inflation-adjusted) growth in income will push more income into higher tax brackets, increasing marginal tax rates on labor and reducing incentives to work. Policy changes pursuant to the Affordable Care Act, including new subsidies for health insurance obtained through exchanges, expansion of Medicaid eligibility, and the excise tax on certain health insurance plans with relatively high premiums, will also reduce the size of the labor force on net over that period.
Joyce Manchester is Chief of CBO's Long-Term Analysis Unit in the Health, Retirement, and Long-Term Analysis Division.