Raising the ages at which people can collect Medicare and Social Security would reduce federal spending and increase federal revenues by inducing some people to work longer. However, raising the eligibility ages for those programs also would reduce people’s lifetime Social Security benefits and cause many of the people who would otherwise have enrolled in Medicare to face higher premiums for health insurance, higher out-of-pocket costs for health care, or both. This issue brief reviews how ages of eligibility affect beneficiaries under current law and how delaying eligibility would affect beneficiaries, the federal budget, and the economy.
Proposals to raise the ages of eligibility for Medicare and Social Security generally reflect concern about the effects on the federal budget of demographic trends that will make supporting retirees more challenging in decades to come. The aging of the population—which stems both from increases in life expectancy and from past declines in fertility—accounts for about half of the growth (relative to GDP) in spending on Medicare and other major federal health care programs projected for the next 25 years and essentially all of the growth (relative to GDP) projected for Social Security outlays. If life expectancy increases and retirement ages do not rise, people pay taxes for a shorter portion of their lives and are retired—and collecting Medicare and Social Security benefits—for a longer portion.
In 1940, people turning 65 could expect to live another 14 years, on average (see Figure 2), so the average person working until 65 could expect to spend about 23 percent of adulthood in retirement. Today, people can expect to live for another
20 years after turning 65, and the average person working until 65 can expect to spend about 30 percent of adulthood in retirement.
Put differently, the expected time in retirement for someone who stops working this year at age 65 is more than 40 percent longer (20 years rather than 14 years) than it was in 1940. (Women tend to live longer than men. Today, as in 1940, 65-year old women can expect to live two years longer than men.)
This issue brief analyzes the effects of raising the ages at which most people become eligible to collect benefits under those two programs.
Three categories of eligibility could be involved in such a change:
- The Medicare eligibility age (MEA), currently 65;
- The early eligibility age (EEA) under Social Security, at which participants may first claim retirement benefits, currently 62; and
- The full retirement age (FRA) under Social Security, at which participants are eligible to receive full benefits, currently 66 but scheduled to increase to 67 for people who were born after 1959.
Raising the MEA or the FRA would reduce federal spending on benefits and affect potential beneficiaries in various ways. But, raising the ages of eligibility for Medicare and Social Security also would induce people to work longer.
Under a schedule of gradual increases in all three eligibility ages, CBO estimates that by 2035, outlays for Social Security and Medicare would fall by 0.4 percent of GDP and federal revenues would rise by around a half percent of GDP—leading to a reduction in the budget deficit of nearly 1 percent of GDP, not including the effects of lower interest outlays.
CBO estimates that the outlay effects would grow to about 1 percent of GDP in 2060, when all retirement benefits would be based on the higher FRA, and the revenue effects would grow to about three-fourths of a percent of GDP in that year. Altogether, the federal budget deficit would be reduced by about 1¾ percent of GDP in 2060.
The gradual increase in the full retirement age (FRA) under current law is generating a reduction in lifetime benefits relative to what people would receive without the increase: For any given claiming age, a later FRA translates into lower monthly
benefits (see Figure 1). Because of the three different rates of benefit adjustment, the effective reduction varies slightly according to claiming age. For example, the
increase from age 66 to age 67 will result in a reduction in monthly benefits of between 6.1 percent (for people who claim benefits at 70) and 7.7 percent (for people who claim benefits at 64). For people who claim benefits at other ages, the reduction falls between those two values.
The rise in the FRA also is increasing the number of people affected by the Social Security earnings test, which reduces the amount paid to beneficiaries who are younger than the FRA and have substantial earnings, thereby reinforcing the stated purpose of Social Security as insurance against loss of earnings. The earnings test affects beneficiaries who are younger than the FRA and earn more than a certain amount—$14,160 for most people in 2011.
An amount equal to half of their earnings above that threshold is withheld from current benefits, but beneficiaries are compensated with higher payments after
they reach the FRA. Typically, the increase in later benefits fully offsets the reduction in benefits at earlier ages.
Despite that compensation, for people who have not reached the FRA but have already begun to receive benefits, the earnings test has been observed to reduce the
incentive to work.
Aging workforce strains Social Security, Medicare – Yahoo! News
An aging population and an economy that has been slow to rebound are straining the long-term finances of Social Security and Medicare, the government’s two largest benefit programs.
Those problems are getting new attention Monday as the trustees who oversee the massive programs release their annual financial reports.
Medicare is in worse shape than Social Security because of rising health care costs. But both programs are on a path to become insolvent in the coming decades, unless Congress acts, according to the trustees.
Last year, the trustees projected the Medicare hospital insurance fund for seniors would run out of money in 2024. Social Security’s retirement fund was projected to run dry in 2038, while the disability fund was projected to be drained by 2018.
New projections in March gave a more dire assessment of the disability program, which has seen a spike in applications as more disabled workers lose jobs and apply for benefits.
The nonpartisan Congressional Budget Office said the disability fund would run out of money in 2016. Social Security’s trustees are again urging Congress to shore up the disability system by reallocating money from the retirement program, just as lawmakers did in 1994.
If the Social Security and Medicare funds ever become exhausted, both programs would collect only enough money in payroll taxes to pay partial benefits, the trustees said.
“I don’t know how to make it clear to the public, but in my mind the sirens are going off,” said Mary Johnson, policy analyst for the Senior Citizens League. “I wouldn’t say we’re under attack, but we are in a very, very serious position.”
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