I’m extremely disappointed. The American Academy of Actuaries is arguing that raising the Social Security retirement age is not a cut in benefits. This comes in a letter to the National Commission on Fiscal Responsibility and Reform, the bipartisan group devising ways to cut the deficit.
A few weeks ago, I tossed off this myth as a no-brainer:
If Social Security benefits don’t start until 70, instead of 67, pensioners will get less than they would have. The piker who dies at 68 realizes a 100% cut.
AAA disagrees. Its reasoning is a bit more obtuse:
When the Social Security retirement age remains fixed over time, increasing life expectancy means a de facto automatic expansion of benefits in terms of increasing lifetime benefits (and, by association, system costs). In other words, while people are retiring at ages that, even after the 1983 reform adjustments, are relatively close to the program’s original retirement age, their life expectancy, or longevity, has increased and continues to increase⎯meaning retirees will be spending more time collecting benefits in the system than prior generations. Increasing the retirement age can contribute significantly to stemming this trend and make the program solvent and sustainable.
What AAA seems to be saying:
- As life expectancies increase, the value of a Social Security pension increases.
- Life expectancies have increased since the last time the retirement age was increased.
- Therefore, the value of the pension has increased.
- Raising the retirement age will return the pension benefit to where it had been, so it’s not really a benefit cut.
I wish that AAA had not attached its name to this reasoning. It is true that the value of the benefit has risen as life expectancy has risen. (All calculations of Social Security benefits take that into account, by the way.) But this seems to say that returning the benefit level to what it had been is not a reduction in benefits. That’s not true.
A person’s Social Security benefit has a certain value today. If we raise the retirement age, the value of the benefit goes down. It’s really that simple.
Let’s take an example. Suppose I gave you two bars of gold today. Tomorrow, the price of gold doubles. Using AAA’s reasoning, I can take one of those gold bars back and you haven’t lost anything.
Or let’s put it in really simple math. Let A represent the market value of a Social Security pension today, what you’d get if the government offered a cash buyout. Let B represent the market value of the pension after an increase in the retirement age.
I submit that B < A. Anyone want to argue otherwise?
And a reduction in the value of the benefit is a benefit cut, AAA hand-waving notwithstanding. (Sorry for the tautology, by the way.)
AAA also argues that raising the retirement age creates a “signaling effect” that tells workers they should retire later. And if they do retire later, they are left with “approximately the same degree of retirement security” as before. That’s true. Once you start to collect Social Security, you would collect the same amount per month as you would have otherwise.
But you have lost the benefits for every year the retirement age went up. If it goes to 70 from 67, you have lost three years of benefits. That has a value.
Sure, you would have the same degree of retirement security once you have retired. But the degree of security is different from the value of the benefit.
By AAA’s reasoning, you could raise the retirement age to 99 and it wouldn’t be a benefit cut. Once you turned 99, you could collect your pension and you would have the same degree of retirement security as before.
To be clear, I’m not arguing against increasing the retirement age, an issue where AAA made a clear stand two years ago. However, I think the organization damages its well-earned reputation as an honest broker on actuarial issues when it employs muddy logic like this.