The Need to Increase the Normal Retirement Age in the U.S. (Essay Sample)

Research Proposal: The Need to Increase the Normal Retirement Age in the U.S.
Name of Student
University Research Proposal: The Need to Increase the Normal Retirement Age in the U.S.
Introduction
The Social Security program is the main lifeline of any nation’s retirement system. It is the major source of income for disabled and retired workers, as well as their dependents and beneficiaries. In the U.S., the first Social Security Act was enacted in 1935 to take care of retirees and old age persons (Grassley & Breaux, 1999). Amendments in 1939 and 1956 expanded the benefits scheme to include dependents and survivors and disabled workers respectively. The government draws much of the revenues for the Old-Age and Disability Trust Funds from the payroll tax submitted by employees and workers covered by the program. Current estimates show that over 96% of workers of the American workforce are covered by the Social Security program.
Background Information
The original Social Security Act pegged the minimum age at which a person was eligible for retirement benefits at 65. The choice of 65 years was a compromise between 60, which was considered too low for many workers considering the burden they will place on the Social Security program by retiring early, and 70, which seemed to be too high in light of life expectancy in 1935 (59 years for men and 63 for women). Beginning in 1956, women were allowed the option of retiring at 62, but at the cost of receiving lower benefits compared to the normal retirement age of 65. This privilege was extended to men in 1961. Effectively, 62 was defines as the Early Eligibility Age (EEA) and 65 as the Normal Retirement Age (NRA). In 1983, Congress saw the need to improve the financial condition of the Social Security program by reducing the duration in which retirees drew benefits from the scheme. Accordingly, it passed a legislation that would increase the normal retirement age to 67 years beginning in 2000. This act will be in effect until 2022.
Problem Statement
The demographic trends in terms of life expectancy have changed drastically in the last three decades. The 1983 projections were based on life expectancies during that period, which was 73.6 years. This age has increased to 78.5 in 2011 (World Bank, 2013). Consequently, the duration of drawing benefits for retirees are poised to increase beyond the projections that informed the Congress Act of 1983 that determined 67 as the normal retirement age. It is not surprising, therefore, that in 1999 the Social Security Trust Fund had projected a financial shortfall of about $3 trillion over the next 75 years (Grassley & Breaux, 1999). The situation could be worse than what these projections show, considering that the baby boomers generation (those born from 1946 through 1964) has just entered their normal retirement age period. Under the 1983 act, those born in 1946 would have begun drawing their retirement benefits in 2013. This number will definitely increase over the next few years as more baby boomers come into retirement. With the current life expectancy of over 78 years, it means that those born in 1946 are likely to continue drawing benefits until 2024. The implication of this situation is that the Social Security Fund Trust will stretch its resources in catering for the ever increasing number of retirees. To aggravate the problem further, a 2007 survey by the Social Security Administration showed that 73.2% of the eligible workers opted for early retirement benefits instead of waiting for the normal retirement age. This implies that most baby boomers might have started claiming their benefits earlier than the estimated period beginning 2013. Assuming that they will live to their ripe age of 78 years, it means that they will be drawing benefits longer than the 1983 projection. This situation portends a serious problem for the Social Security Fund Trust, which will have to cater for more people for a longer period, thereby stretching it resources to unsustainable levels. In this regard, it is necessary for the government to revise the relevant retirement and benefits acts to address the financial crisis that faces the Social Security program.
Purpose of the Study
Considering the financial implications of the baby boomers generation coming into retirement, the proposed research study will investigate how raising the normal retirement age from 67 will lessen the Social Security Fund Trust’s financial burden and reduce government expenditure. In particular, the study will focus on the long term impact of increasing the retirement age of men, who constitute 55.5% of the American work force (U.N.D.P, 2013), on the long term sustainability of America’s Social Security program .
Research Questions
According to the human capital theory, human labor is an asset for economic growth and productivity. In light of this theory, extending the duration that a person works is an investment that increases the productivity of the work force. Accordingly, early retirement translates into a waste of human capital; it removes valuable skills, knowledge, experience, and competencies for the labor market. In addition, attainment of retirement age transforms the human capital asset into a liability, since retirees draw benefits from social security programs, which are funded by taxes. The proposed study will investigate the relationship between retirement age (independent variable) and financial stability of America’s Social Security Trust Fund (dependent variable). The study will also consider the financial impact of early retirement (control variable) by allowing early retirees to invest their benefits. Towards this end, my interest in this topic is informed by the following reasons.
I want to gain insight into how retirement age affects national expenditure.
I want to understand the relationship between the size of a retirement population and financial stability of social security programs.
I want to understand the economic impact of increasing the retirement age.
I want to find out the impact that raising the retirement age of men will have on America’s Social Security Trust Fund.
I want to know if early retirements will have a more positive impact on the economy (through investing of retirement benefits) than late retirement.
Literature Review
The biggest source of retirement income for most Americans is social security retirement benefits. Blanchett (2012), in a paper titled “When to claim social security retirement benefits,” provides an overview of the social security retirement benefits system and offered an insight on the main factors to be considered in determining when to begin taking social security retirement benefits. He conducted separate test which considered life expectancy, the costs of purchasing similar insurance cover, taxes and the benefits of a surviving spouse, all which are essential in determining when to take social security retirement benefits. He considered three situations; receiving benefits early (age 62 compared to age 66), delaying benefits (age 66 compared to age 70) and a real delay (age 66 versus age 70).
The findings found that the benefits of delaying receiving social security benefits are significant. On the other hand, retirees with a short life expectancy or those who invest more aggressively and have the potential to gain a high return on their retirement portfolios are better off taking their social security earlier. These findings are supported by Social Security statistics showing that the number of workers claiming their retirement benefits at age 62 increased by more than 2 percent during the recession period (U.S. Social Security Administration, 2013).
The study by Blachett also found out that social security retirement claims decisions increase the lifetime income of a married couple by 9.15%. This increase is equivalent to ‘financial planning gamma’ or alpha of +.74 % a year in a full retirement period.
David used the ‘breakeven analysis’ approach to determine when it was better to take social security retirement benefits. The analysis produces a value that equates the benefits of early retirement to those of delaying retirement. The breakeven questions are then worked out in term of age and returns or both combined (Blanchett, 2012).
He concluded that there were significant gains in selecting the optimal age of starting to take social security retirement benefits. He found that delaying benefits can increase the retiree’s income by 9.15% for a hypothetical couple. In addition, David wrote that most retirees gain more by delaying benefits until the full retirement age. The delays were however less valuable for men compared to women.
A report to the chairman and the ranking minority member of the special committee on aging in the US senate analyses the life expectancy of the American people. It analyses the change in the life expectancy and the effects the increase has on social security retirement fund. It also report on the benefits that are associated with the higher retirement age (Grassley & Breaux, 1999). They analyzed a data set representative of the nation on health and retirement that was compiled by social research institute of the university of Michigan and data from SSA. They also used a ‘policy simulation model’ to determine the effects of increase in retirement age to the trust fund solvency. The report concluded that raising the retirement age for social security benefits had disproportionate on effects on some vulnerable populations. The report suggested that they advantages of increasing the retirement age against other options that have a better balanced effect on distribution. They reported that the less healthy people and blue collar workers were unlikely to continue working.
In their pa...