Social Security Reform:

Raising the Retirement Ages Would Have Implications for Older Workers and SSA Disability Rolls

GAO-11-125: Published: Nov 18, 2010. Publicly Released: Nov 18, 2010.

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Life expectancy has increased over the last several decades, and by 2050 persons age 65 or older will account for more than 20 percent of the total U.S. population, up from about 13 percent in 2000. Without significant changes in retirement decisions, these improvements in longevity are expected to lengthen the average number of years that Americans spend in retirement and contribute to the expected long-term revenue shortfall in the trust funds for Social Security's Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) programs (collectively knows as OASDI). The 2010 report from the Social Security Board of Trustees projects that the trust funds' assets will be exhausted by 2037. In light of the long-term trust fund solvency issues and increased longevity, many have suggested changing the earliest eligibility age (EEA) at which workers first qualify for retirement benefits, the full retirement age (FRA) at which they receive full benefits, or both. By reducing monthly benefits for those taking early benefits or delaying eligibility, raising the retirement ages could create an incentive for workers to delay retirement, thus earning more income and possibly saving more for retirement. However, raising the retirement ages would likely increase the number of workers applying for and receiving DI benefits. More DI applications and beneficiaries would reduce some of the financial savings for the combined OASI and DI trust funds and increase the Social Security Administration's (SSA) disability caseload, which already faces a serious backlog. In this context, Congress asked us to address issues related to the potential impact of raising the EEA or FRA on the DI program and on older workers--in general, workers in their sixties, but in particular those approaching age 62, just prior to becoming eligible for retirement benefits. This report answers the following questions: 1) What do the health, occupational, and demographic characteristics of those near retirement age indicate about the potential for these individuals to continue working at older ages? 2) What is known about the effect a change in Social Security's EEA and FRA could have on retirement and disability benefits and applications for disability? 3) What policy options might help mitigate the effects of increased retirement ages on those who may not be able to work longer?

(1) While general improvements in longevity, health, and workplace conditions over recent decades suggest that most workers would be capable of working to a later retirement age, many older workers would face health or physical challenges that could prevent them from working longer. According to our analysis of preretirement age individuals using the HRS, about one-quarter of age 60-61 workers--those just prior to early retirement eligibility and most likely to be impacted by a change in retirement age--from 1998 to 2008 reported a work-limiting health condition, and about two-thirds of those who work report having a job that is physically demanding. Disability rates increase with age, suggesting that workers postponing retirement would face increasing likelihood of becoming disabled. Even healthy older workers may have trouble staying in the labor force longer as those that lose their jobs are less likely than younger workers to get rehired. (2) Raising the EEA or FRA could increase the number of applications to and beneficiaries of DI and other assistance programs, as well as change retirement benefits. Raising the EEA would postpone eligibility for retirement benefits and could cause some older individuals with work-limiting health conditions to apply for DI instead of waiting to claim retirement. Raising the FRA reduces retirement benefits for individuals who retire early, and could create a financial incentive to apply for DI benefits, which are not reduced. A few researchers have begun to study the effects of the prior increase in the FRA, and two studies conclude that the increase has led to more DI applications. SSA actuaries estimate that raising the FRA further would increase the number of DI beneficiaries. With respect to the OASDI trust funds, the actuaries project that raising the FRA would improve solvency, but raising the EEA alone would worsen solvency. (3) Experts we interviewed indicated that modifications to the DI program and policy changes that provide alternative income support for low-income workers or employment support could help older workers who are unable to work, do not qualify for DI benefits, and are unable to receive enough support from existing programs. While existing programs like unemployment insurance and workers' compensation could provide some support for older workers, they are generally of limited duration and not everyone may qualify. Some proposals to support older workers include modifying the DI program, such as by allowing determinations of "partial disability" similar to how the Veterans Administration determines disability. According to SSA, however, this would be a major change, and SSA would expend significant resources in making such modifications to the DI program. Other proposals include options for income support in the absence of DI, such as setting different EEA's for workers based upon lifetime earnings, with lower earners having an earlier eligibility age; however, this policy may not specifically target workers who experience a disabling condition. Raising the EEA would likely have larger effects than a comparable rise in the FRA on retirement decisions, DI applications and awards, and on vulnerable older workers because it would remove the age-62 early retirement option, as opposed to lowering benefits for all early retirees. Changes in the retirement age could conceivably improve retirement security for able-bodied workers if they cause them to work longer and save more for retirement, but it could worsen security for those unable to do so. While policy options exist to mitigate the impact on affected workers, doing so will likely require expanding programs and increase benefit costs. Finding the balance between worker protections and costs will likely be challenging.

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