The Impacts of Increasing Social Security Retirement Ages: Varied Responses Across Occupations

• In Event: Economic Shocks and Retirement Choices

Abstract

With U.S. Social Security payments to retirees now exceeding the payroll taxes that fund them, reforms are imminent. Further increasing the Social Security retirement age is one possible approach among many possibilities to achieve solvency. This paper considers the effects such a policy change would have on work, claiming, disability, and welfare across people in different occupations. Using data from the Health and Retirement Study (HRS), I show that past reforms were responded to differently by blue- and white-collar workers and estimate a dynamic model of work, savings, and decisions about Social Security under various existing and counterfactual Social Security rules. I find that increasing the Early Eligibility Age has large labor supply and disutility effects for blue-collar workers, and results in greater SSDI application and SSI eligibility for this group. Increasing the Full Retirement Age affects the labor supply of white-collar workers but not blue-collar, however it does increase the savings somewhat for all. Finally, I show the effects of a more occupation-neutral Social Security policy design, which considers longer years of work history in benefit calculations. More generally, this study demonstrates the importance of incorporating preference and state heterogeneity in both predicting responses and measuring distributional welfare effects across policies: In this case, compared to a model of heterogeneous agents, a model with representative preferences and occupations overstates fiscal costs and understates average welfare reductions resulting from increases to Social Security retirement ages.

Author

• Lindsay Jacobs, lpjacobs@wisc.edu