Germany, after passing legislation in 2007 that would have increased the retirement age from 65 to 67, is now on a course to lower the retirement age from 65 to 63.
Life expectancy has increased in most developed countries by more than ten years from 1960 to 2011, from slightly below 70 years to over 80 years. New developments in health care technology and knowledge are projected to further increase life expectancy in the US to as high as 86 by 2050, with those reaching age 65 in 2050 perhaps living on average to be 90. For reference, the life expectancy for someone born in the US in 1930 averaged about 60 years.
We may argue about the rate of growth in life expectancy but it would seem foolish to make public policy that seems to explicitly presume a decline in life expectancy. (Hello Germany? Are you there?)
Let’s see what happens based on an average static life expectancy of 85 years. We develop to become productive citizens the first 20 years, we work for the next 45 years to age 65, then retire and live to 85. Each of us, on average, must earn and save enough wealth to both pay for the development of our own children for 20 years and then pay for our expenses in retirement for 20 years, or we as a country will go broke. When you borrow money from future generations to pay these costs you delay the time frame within which you may go broke but you increase the probability you will in fact go broke because you have to generate the income and wealth to pay back the loans with interest as well as pay the costs of developing the young and supporting the old (not to mention the costs of supporting the poor, the unemployed, the hungry, the oppressed masses, etc., etc.). An average of 45 years of work and 40 years of assured dependency can’t work financially in perpetuity.
The preceding example analysis omits a further negative impact resulting from public employee union contracts that provide for retirement benefits including lifetime healthcare after only 20 to 30 years of service (see New Jersey as the poster child).
The point is that devaluing work by reducing the legal retirement age makes no sense given actuarial reality. Such policy destroys value. The opposite policy creates value and we in the US should be implementing policies that encourage work throughout adult life.
Both morally and financially we need policy that rewards work, especially work that defers or avoids socialized costs related to retirement health care and living expenses.Toward this end we should be raising the age to qualify for social security and medicare as a function of increasing life expectancy while providing incentives for employment for those above the qualifying age. Such incentives for continued employment may include a reduction in earned income (W-2 income) tax rates with age beginning at the age of social security qualification. The more people pay their own way through work in their older years the greater the financial incentive they should receive to work even longer.
To create a retirement system that is sustainable across generations we need to restructure virtually all government subsidy programs and priorities to value rather than devalue work while removing the expectation that some anonymous someone else will subsidize our later years of life.
Regards, Pete Weldon