Is it Time to Retire the ‘Normal’ Retirement Age?
British satirist C. Northcote Parkinson famously noted that “all work expands so as to fill the time available for its completion.” A corollary might be that a worker’s capacity expands much like a balloon, giving more space (productivity) in proportion to how much air (career) is added. Of course, even the stretchiest of balloons eventually pop, so that career-length capacity shouldn’t be viewed as limitless.
When should we expect that working life ‘pop’ to happen? Normal retirement age has long been conventionally held to be 65, a number we owe mostly to the Germans from a policy they derived around World War I. Most of the world adopted roughly the same end-of-work age and have stuck with it since. In the U.S., Social Security, Medicare, and most employer-sponsored retirement plans cluster around 65 as the assumed end of a fulltime working career.
In an era where more American workers are retiring each day than ever before – Boomers, that’s you – a great deal of analysis and electronic ink has been put to examining whether that age is still the appropriate target. If we’re living longer, on average, then we can expect more years of life post-65, requiring more savings to supply enough income. Put another way: the longer we live, the more likely we are to run out of money, individually and collectively.
From a public policy perspective, there are few life numbers more sacrosanct than the age at which we retire. Protests erupted across Paris and other parts of France in late March of this year as the French government put in place plans to increase their national retirement age from 62 to 64, reducing or delaying benefits accordingly. French citizens, as they do, took to the streets in opposition to the change, setting occasional fires and generally voicing their stark opposition. Any suggestion of changes to benefits in the U.S., typically focused on the Social Security “start date,” is met with similar disdain, albeit with generally less fire-setting.
The topic is undeniably vast and nuanced, so let’s examine these two things: Social Security benefit solvency and the forward viability of a normal retirement age of 65.
“Social Security won’t be around by the time I need it anyhow…”
The younger you are, the more likely you are to share the lament above. From the figurative Social Security “lockbox” to the “third rail of politics,” there is no shortage of alarmism and discussion around our governmental retirement safety net. Social Security is a fiercely debated and staunchly protected entitlement for most U.S. citizens. We are mandated by law to contribute a portion of our paychecks – our employers pony up for their share as well – and so we rightfully expect that we’ll benefit from those contributions at some point in our future. That was the goal when it was established in 1935, and it remains so today.
Enter the U.S. Congress, a body that never met a pool of money it didn’t want to dip into. The promise of Social Security remains, but the inherent guarantees of it have wavered over time as commitments made haven’t always matched the projected money to pay them. Borrowing against or from the dollars set aside for late-life entitlements has been too appealing as time has passed. But even the most pessimistic of assessments show looming shortfalls, not bare cupboards. In other words, without formulary changes or similar the Social Security trust will run short of the ability to pay benefits fully, but it won’t run dry anytime soon.
This is, in the barest terms, a math problem. When Roosevelt and his contemporaries enacted the New Deal, life expectancy was about 60 years, and benefits kicked in at 65. The average individual didn’t even live to see their start date, let alone collect benefits for 30-40 years thereafter. As years have gone by, advances in nutrition, health, and safety have meant we live longer. Population growth can only offset so much of the resulting shortfall, so something will have to give: increased contribution rates, reduced benefits, or later benefit start dates. Whether the trust is protected by Congress or “borrowed” and repaid, the numbers won’t add up the same way they did in Social Security’s early years.
Great (Life) Expectations
Conventional wisdom is that we are living longer than our parents, and certainly longer than our ancestors. That’s functionally true, overall: in 1900, life expectancy was 47 years. That number reached a peak of 79 in 2019, but then dropped in both 2020 and 2021, to 76. A 2.7-year drop may not initially seem all that large, but it effectively puts us back 26 years, to levels not seen since 1996. The COVID-19 pandemic and its aftermath are certainly an obvious and key factor, but prescription and illicit drug overdoses have had an understated role in curbing our longevity among coincident rises in heart disease, cancer, and suicide rates. Each illustrates the point that even our best projections are guesses at best, and subject to the inevitable and unpredictable wildcards, whether impactful historical events or other disruptions.
All of which brings us back to the question of age 65. Aggregate statistics are useful, but all questions of life, longevity, and savings are individual – it doesn’t matter how long the average person lives, or how much income they’ll need; it matters how much you will need. While retirement plans and government authorities may or may not stick with 65, each of us must adjust our savings and expectations in planning for sufficient retirement income, potentially for more years than we think. Retirement savers and employers who offer tax-advantaged savings as a benefit both must carefully consider the ramifications of living longer, needing more income, and perhaps expecting less from government retirement entitlements.