Raising, or Eliminating, the Retirement Age

If people live to be 100, how will that affect the retirement and health insurance systems set up to help individuals through the last decades of their lives?

As it is now, different countries have different retirement policies. In the U.S., there is no mandatory retirement -- with the exception of certain job categories such as commercial airline pilots, some judges and some top-level management -- and, in fact, in most jobs it is illegal to force people to retire. But numerous signposts act as "de facto" retirement inducers, says Mitchell. For instance, under the U.S. Social Security system, the "normal" retirement age is defined as 65 (eventually moving up to 67). The official use of the term "normal" was intended to mean the age at which someone could begin collecting unreduced benefits, but over time it became a reference age automatically associated with leaving work. Another example of this is that the system currently allows one to claim benefits as young as age 62 (though payments are reduced). "My concern is that by codifying age 62 as the age at which one can begin receiving Social Security, this age becomes a target. In fact, the typical American claims benefits at age 62, even though many would benefit substantially by delaying claiming."

In the next few years, Mitchell argues that "retirement ages will have to rise quite substantially, to 70 or beyond, to finance the baby boom generation as it moves up through the age structure." When Social Security was put in place in the 1930s, she says, "life expectancy was a lot shorter. In fact, we adopted our concept of the 'normal' retirement age from the German system which set the age of retirement at 65 because half the people never lived that long. That was a true social insurance scheme; it only covered those who outlived their life expectancy." Over time, Mitchell notes, "the U.S. transitioned from thinking about Social Security as a longevity insurance scheme, to using it as a transfer program that pays people not to work for 30 to 40 years. As life expectancies rise, and fewer young people are available to pay taxes, it gets more and more expensive to sustain the scheme. If we are to finance longer life spans, we will have to train smarter, work longer, save more for our own retirement, and restructure Social Security as the longevity insurance program it was intended to be." Retirement, Mitchell adds, "isn't going to be as appealing for future generations, as it has been for our parents."

According to Kent Smetters, Wharton professor of insurance and risk management, the Social Security and Medicare trustees have already incorporated increases in longevity in planning for payments to senior citizens. "The big debate is over whether they are incorporating enough of an increase." Longevity is an important variable, he says, because under current law, "the retirement age is not automatically indexed to increases in longevity," meaning that a larger and larger fraction of the population is going to be in retirement if they continue to live longer without facing an increase in the retirement age. "Eventually, the normal retirement age will have to become more proportional with the growing length of life, maybe 70 or even 75 over time within a few decades. That age might seem ridiculous to people now, but it probably won't in 20 or 30 years. People could still choose to retire at 62, but their benefits would be greatly reduced, based on a normal retirement age of 70 or 75."

He views the increase in people's life expectancy as "a positive development provided that we as a nation can deal with the increasing strain on entitlement programs. However, there will be some debate. The 2001 Social Security Commission encountered public opposition from labor leaders and some employers to increasing the normal retirement age. Still, when not on public record, almost everyone who testified agreed that it would eventually be necessary. The math simply requires it."

As for Medicare, "the longer people live, the more taxed the Medicare system will be," says Smetters, adding, however, that Medicare is more non-linear than Social Security, which is a cash benefit that keeps on paying. With Medicare, a majority of a recipient's health care costs are concentrated in the last two or three years of life. So "pushing out that particular portion of spending into the future will save money in present value." But another portion of money is also spent before the last few years of life: Increasing those years, therefore, increases spending. "The net effect will be to increase the Medicare costs, which is a big problem because Medicare shortfalls are already so huge and the program is already so underfunded. The crisis for Medicare will come much sooner than the crisis facing Social Security."

Wharton health care management professor Mark V. Pauly concurs with the view that the extra years being added on to life expectancy are generally high quality ones, "so much so that a person's present discounted value in Medicare spending doesn't really go up that much when we add increased life expectancy because most of the buildup in [health care costs] occurs in the last few years of life. Everybody has those last few years; they will just have them later." This is not a guaranteed scenario, he adds, because health maintenance expenses incurred by people as they age might cause additional strains on the system that are hard to anticipate now.

Indeed, he says, "Medicare is in such terrible shape that any problems posed by increased longevity are minor." And it's not getting better, he adds, pointing to health care reform proposals from Congress and the Obama administration which he says are taking away money that should be used for Medicare. "There are ways to mitigate the Medicare disaster, but they have been hijacked by health care reform," he notes, citing one specific proposal to take money out of private Medicare plans to pay for health insurance for people under 65. "We all have ideas of how to save Medicare, but our arsenal of relatively modest tools has been used to pay for health care reform."

The retirement picture is different in Europe, "where we have very strict retirement ages," says Doblhammer-Reiter. "It is 65, and in many countries, it will increase over the coming years to 67. But actually people now retire at the beginning of their 60s. Nobody works until 65," she notes, in part because older workers are more expensive and less flexible, which means that in times of high unemployment, they are laid off more often than other age groups. In Europe, she adds, "the countries with the highest life expectancies have the lowest retirement ages. Italy is an example. This is not sustainable; the pension system can't be funded if it isn't changed. There is no way out of either cutting the pension allowance or having people retire later."

What age should retirement be set at as we encounter generations living into their 100s? "It depends on the occupation," Doblhammer-Reiter says, "which means we probably need flexible retirement ages. I am a professor. In Italy, professors work until age 75. In Germany, there is a mandatory retirement age of 65, although for my cohorts it will be 67.... Yet I'm sure I could work until 70 or 75." A number of European countries are currently considering ending mandatory retirement based on age, Vaupel points out. "Denmark last year already [did].... And there is a move towards making pensions actually fair: If you work more years of your life, you get a bigger pension. People will have a choice about when to retire. My guess is that many will elect to work longer."