The researchers start with a basic demographic forecast. According to their work, a man who turned 80 in 2010 would, on average, have a longer life expectancy than was enjoyed by a man who turned 80 in 1980. The average, though, is misleading. For men in the top 40 percent of the income distribution, that amounts to seven or eight extra years of life. But for men in the bottom 40 percent, it amounts to basically nothing.
That growing inequality in life expectancy between people born around 1930 and people born around 1960 has changed the distributive implications of America's retirement programs.
Historically, the distribution of benefits was about flat. Richer people received more Social Security benefits, but that was offset by higher Medicaid and disability insurance payouts to lower-income people. But for younger cohorts, the affluent get about $130,000 more in lifetime benefits than the poor. And they find that the most simplistic forms of program cuts that involve raising the age at which you can first claim benefits exacerbates the situation:
- Raising the Medicare age from 65 to 67, as the Obama White House and congressional Republicans contemplated in budget talks, would reduce low-income men's wealth by about 1.4 percent and high-income men's wealth by just 0.5 percent.
- Raising the earliest age at which one can claim Social Security benefits from 62 to 64, similarly, ends up being regressive. What's more, the researchers argue that this change would actually increase total lifetime benefit payments on average because people who opt to retire early end up with lower monthly payments.
Benefit cuts generally hit the rich harder than the poor
The researchers also simulate the effect of a couple of proposals that aim to specifically target benefit cuts at more affluent retirees — and find, not surprisingly, that this works. The more striking claim is that a broad, across the board cut in benefits has a progressive distributive impact because richer people live longer.
- A common proposal to cut the monthly cost of living adjustment (COLA) for Social Security benefits, for example, reduces higher-income men's wealth by 0.6 percent and lower-income men's wealthy by only 0.4 percent. The impact of the COLA accumulates over time, so it matters more to higher-income men.
- Interestingly, the team also finds that raising the so-called "normal retirement age" by three years, from 67 to 70, cuts benefits more for the rich. Wealth falls for poorer men by 4.8 percent, while for more affluent ones it falls by 5.2 percent.
This latter finding stems from the fact that despite the rhetoric of "raising the retirement age," in a practical sense lifting the NRA is simply an across-the-board benefits cut. The way Social Security works is that you get an initial benefit, which is pegged to the amount of payroll tax you paid in your working years. You can claim this benefit at any time between the age of 62 and 70.
But if you choose to retire before the NRA (traditionally 65), your benefits are reduced — and they are reduced more the earlier you retire. If you delay retirement past the NRA, your benefits are enhanced, and they are enhanced more the longer you delay.
So when the NRA was raised from 65 to 67, nothing changed about when you can retire. It's simply that benefit reductions got bigger and enhancements got smaller. Raising the NRA further would, again, simply mean that everyone's monthly check goes down regardless of when you choose to retire. Since more affluent men live longer than poorer men, this winds up being a progressive change in the benefit structure.