What would raising the Social Security full retirement age accomplish?

Social Security’s costs have exceeded its income from taxes and interest since 2021. The government currently relies on the assets in the Old-Age, Survivors, and Disability Insurance (OASDI) trust fund to help finance benefits. Once the trust fund is depleted—which Social Security actuaries put at 2035—revenues will be sufficient to cover only 83% of benefits. Raising the full retirement age would improve the financial outlook of the Social Security system. This post explains the “full retirement age” and the potential consequences of changing it.

What is the full retirement age? What is the history of changes to it?   

The full retirement age (FRA) is the age at which new retirees are eligible to claim full Social Security benefits. It is currently 67.

Workers can opt to receive benefits as early as age 62, the early eligibility age (EEA). Claiming Social Security before reaching the FRA, however, permanently lowers a retiree’s monthly payments, an adjustment that is intended to make the lifetime benefits of people who claim early roughly equal to those who claim later. For example, if benefits are claimed at 62, they are reduced by 30%. People can also delay receiving benefits until age 70. Late claimers see a permanent increase in their monthly benefits.

The FRA was set at 65 when Social Security was established in 1935. In 1983, Congress made major changes to Social Security to address a near-term funding shortfall and the long-run solvency of the trust funds. Along with other reforms, lawmakers scheduled a gradual increase in the FRA from 65 to 67 for new old-age claimants born after 1937. For workers born in 1938, the FRA was set at 65 and two months. It continued to rise in two month increments for each successive birth year until reaching 66 for those born in 1943. In 2017, the FRA again began rising two months a year until 2022, when it reached 67. The FRA will remain at 67 unless Congress enacts new legislation.

Are adjustments for taking benefits actuarially fair?

Actuarial adjustments are meant to ensure that lifetime benefits are roughly similar for beneficiaries with an average life expectancy regardless of when they first claim. However, these adjustments have not been updated to reflect falling interest rates and increasing longevity, both of which call for a smaller reduction in benefits for claiming early and a smaller credit for claiming late.

Some economists believe the adjustments are no longer actuarially fair. Researchers at the Center for Retirement Research, for example, find that “the reduction for early claiming is too large,” while the increase for delaying—“initially too small—is now about right.” Economists also find that high earners live longer and are more likely to delay claiming, meaning the actuarial adjustment has distributional consequences favoring high earners.  

What changes to the FRA have been proposed?

Several proposals would raise the FRA by one to three years. These increases would be implemented gradually, often at a pace of one or two months per birth year.

Other proposals would index the FRA to life expectancy to ensure the proportion of a worker’s lifetime spent receiving benefits remains constant over time. Such an adjustment would automatically increase the FRA by about one month every two years.

Another option is to raise the early eligibility age (EEA), which has been unchanged since Social Security’s inception. Such a policy would reduce the years of payments received by early retirees but increase their average monthly benefit amount. Gradually raising the EEA by two years without simultaneously upping the FRA would generate short run savings by delaying payments for early claimers. In the long run, however, higher monthly payments would offset any savings, and a higher EEA would likely induce more older workers to apply for disability benefits. As a result, raising the EEA is actually projected to worsen Social Security’s financial outlook over 75 years.   

What are the effects of raising the retirement age?  

Raising the retirement age is equivalent to a benefit cut for all new retirees. Why? Consider someone retiring at 62. If the FRA increases from 67 to 68, the actuarial adjustment for retiring at 62 will be larger—meaning that benefits will be smaller. Consider someone retiring at 68. When the FRA is 67, their monthly benefit is adjusted upwards because they delayed retirement; when the FRA is 68, it isn’t. Upping the FRA to 70 is economically equivalent to a benefit cut for all new retirees of roughly 20%.

Raising the FRA could have larger effects on labor force participation than an economically equivalent reduction in benefits. Researchers have found that workers often base their retirement decisions on salient benchmarks or norms, such as government retirement ages, rather than economic incentives.

How much could raising the FRA help Social Security finances?

Economists often assess the impact of a change in the FRA on Social Security’s 75-year actuarial balance—the permanent increase in revenues or reduction in benefits that would restore 75-year trust fund solvency if implemented immediately. The chart below shows the improvement in the actuarial imbalance (first column) and in the difference between income and revenues in the 75^th year (second column) that would be eliminated by various changes to the FRA. Larger increases in the FRA would have a greater positive impact on Social Security’s finances.

An increase in the FRA from 67 to 68 would close 12% of the 75-year actuarial imbalance, but a two-year increase in the FRA followed by a one-month increase every two years—the equivalent of longevity indexing—would solve almost 40% of the long-run actuarial imbalance and 55% of the 75^th year gap.  

How would changes in the FRA affect the progressivity of the Social Security system?

Some people oppose raising the retirement age because they believe it to be unfair to workers with shorter life expectancies. However, raising the FRA reduces benefits for all new retirees proportionally, so it doesn’t favor those who are expected to live longer.

But the gap between the life expectancy of higher-income and lower-income workers is widening. That raises concerns that the existing Social Security system—which is designed to be progressive by replacing a larger share of wages for lower earners than for high earners—is becoming less progressive.

Some lawmakers and advocacy groups have proposed adjusting the FRA to improve the progressivity of the Social Security system. The Center for Retirement Research, for example, proposed a flexible FRA, in which workers with lower lifetime earnings are subject to a lower FRA than high earners. Others advocate linking the retirement age to years of work. Less-educated workers typically enter the labor force at younger ages than those who go to college and thus work more years. They also generally have lower earnings and more often work in physically demanding occupations.

Would changing the retirement age affect the age at which workers choose to retire?

Workers tend to retire when they reach the FRA. Raising the FRA might increase employment among older workers who remain in the labor force for longer.  

Researchers have found that retirements spiked at age 65 for workers born in 1937. As the FRA was raised in two-month increments to 66, workers tend to delay benefit claiming until age 66. A study using data from German pension programs found that workers’ retirement decisions are seven times more responsive to statutory retirement ages than financial incentives alone.  

However, even major changes to Social Security may produce only modest impacts on retirement behavior and employment.

Economists theorize that retirees exit the labor force based on slow-moving norms, which serve as a “reference point” from which workers frame their retirement decisions. Data from the Health and Retirement Study showed that about half of workers born between 1948 and 1953 considered 65 or 62 to be the “usual retirement age,” despite their FRA being set at 66. Only 0.4% thought 66 was the usual age to retire.

One study found that when the FRA was lifted from age 65, benefit claiming moved in tandem with the incremental increases in the retirement age, but the large spike in retirements at age 65 remained. This suggests that raising the FRA may have limited impacts on labor supply for older workers.