Contingencies Online - November/December 2009

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Commentary continued
since 1930,
the life expectancy
at age 65 has increased
an average of about
one month every year.
over the 70-year period,
that amounts to
nearly six years.

In 1983, while Congress was changing benefits, it changed the normal retirement age. For persons born after 1937, the retirement age rises two months per year from age 65 to age 66 and then plateaus for 12 years. Subsequently, it rises again two months per year from age 66 to age 67, where, under current law, it remains. However, in 1980, the life expectancy had already improved to the point that a 71-year-old had a longer life expectancy than the 65-year-old in 1930. And in 1990, that life expectancy had risen beyond age 72. Using the 27 percent proportion of working lifetime, the optimum age for retirement in 1980 was 68 years.

Over the 70-year period, death rates at most ages have been declining approximately 1 percent to 2 percent per year. Given the resources being committed to health care, it would be unreasonable to assume that this will change. If the trend continues just to 2010, the life expectancy at age 74½ will equal what it was at age 65 in 1930.

We are dealing with a dynamic population with increasing lifetimes and declining mortality. The 1980 changes were belated and inadequate. A solution that maintains balance requires a dynamic design. The intergenerational equity ratio (a constant ratio of something like 27 percent) of post-retire-ment life expectancy to life expectancy at the beginning of working life is simple to define and administer and goes a long way toward establishing that balance.

Social Security is a political creation affected by many factors. This is one of several changes necessary to stabilize the system. But it’s one that will go farther than any other in establishing equity between generations while significantly reducing the problems of financing. Because once the target ratio is set, with the rest self-adjusting, it will also reduce political anguish. It can be easily administered on a regular schedule by the Social Security Administration. Any uncertainty introduced for younger lives would be no greater than presently exists.