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It’s time to raise the retirement age again

Donald Trump and Russian President Vladimir Putin and both correctly agree on an important fact for national retirement policy: People live longer than they used to.

In his Executive Order on Strengthening Retirement Security in America, President Donald Trump instructed the Secretary of the Treasury to “examine the life expectancy and distribution tables” which govern mandatory retirement distributions. Under current law, a retiree must begin to receive her pension, IRA or 401(k) distributions no later than her “required beginning date.” For most people, this date occurs between their seventieth and seventy-first birthdays. Once such mandatory distributions have begun, they must be paid over the person’s remaining life. Because the average American is living longer than before, the executive order states, the Treasury tables (based on earlier, shorter life expectancies) may force “retirees to make excessively large withdrawals from their accounts.”

President Putin’s recognition of the pension implications of longer life expectancies has taken the controversial form of proposed later retirement ages to receive the Russian equivalent of Social Security payments. Under current law, Russian women start government pensions at age 55 while men commence such pensions at age 60. Putin proposes that the retirement age of Russian men be delayed in stages to 65 while the retirement age for women will be set in stages at 60—three years earlier than Putin’s original proposal to establish 63 as the female retirement age in Russia.

Both the Trump and Putin proposals reflect the fact that, on average, people live longer than they did when current retirement ages were established. Pension policy must confront these greater longevities.

Averages, of course, are just that, averages. Within the overall trend towards longer life expectancies, there are exceptions. In the United States, average life expectancies have actually decreased slightly in the last two years. Russian life expectancies are considerably lower than those in other industrialized nations.

Nevertheless, on balance, in both countries, and throughout the industrialized world, people live longer than they did when current retirement ages were established in 1983. Longer lives mean longer retirement payouts. This strains the finances of public and private pension plans. The French pension system, for example, confronts this same phenomenon of extended pension payouts.

This is not an unprecedented problem. In 1983, after intense partisan wrangling, President Ronald Reagan and House Speaker Tip O’Neill negotiated a compromise to bolster the finances of the federal Social Security system. One important part of that compromise was the decision to raise gradually the Social Security normal retirement age from 65 to 67. Thirty-five years later, a similar increase may be appropriate to bolster the finances of the Social Security System. The Committee for a Responsible Federal Budget, using numbers from the Congressional Budget Office, estimates that moving the Social Security normal retirement age from 67 to 70 by 2035 would save $120 billion.

A rejoinder is that it is easy for white collar workers who love their jobs (e.g., law professors like me) to propose delaying retirement ages. For blue collar employees whose jobs are more physically taxing, delayed retirement looks less attractive.

It’s a fair criticism. The problem is that a system with varied normal retirement ages based on occupation would in practice be unworkable. For example, some think of manufacturing as a classic, physically -taxing blue collar job but much manufacturing today involves the operation of computerized equipment. In a system with different retirement ages for different occupations, how would the system distinguish between the manufacturing employee whose work is physically strenuous and the manufacturing worker whose high-tech environment is not? What would be the retirement age of a line-worker who is promoted to a management position?

The age adjustments proposed by President Trump are politically (relatively) easy since these adjustments will enable retirees with relatively large retirement accounts to withdraw their funds more slowly if they want. The kind of Social Security reform adopted in the U.S. in 1983 and now proposed by President Putin is politically tougher to enact since, even when phased-in, delaying pensions can disappoint the expectations of those affected.

But, at the end of the day, the solvency of public pension systems will require bi-partisan cooperation in the spirit of the Reagan-O’Neill compromise of 1983. Along with additional tax revenues, delaying the age of retirement to reflect longer life expectancies should be a component of that cooperation.

The two presidents are correct: we are living longer and pension policy must adjust to the reality of expanded longevity.

Featured image credit:  Photo by rawpixel via Unsplash.

Recent Comments

  1. Pete

    Living longer does not necessarily mean living well.

  2. Paul Jones

    Great idea, the life expectancy in the US is 78.6 years and dropping, so someone who spends 50yrs contributing gets to enjoy 8yrs of benefits. Good thing you are a law professor not a math professor

  3. David Wilson

    Can you blame anyone who does do a physical job, or a driving job, or lives a hands on rural life, even any none city dweller that lives in a tougher part of the country than the warm climates of the South from drawing the conclusion that this looks like the plan is to work the manual labourers to death so they don’t reach retirement and cost the state.

  4. Vin

    Raising the retirement age is rational, though not without challenges with regard to those not able to perform in the same capacity or due to a lack of opportunity to do so. A palatable bipartisan solution might require modifying more than one lever. What are those levers? The American Academy Actuaries developed a tool for answering this question, http://socialsecuritygame.actuary.org.

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